Are Your Prices Hitting the Mark? Finding the Right Price Point for Your Customers and Your Organisation

Setting the right price for your product goes beyond just covering costs. It requires creating an offer that meets customer expectations and provides them with real value. This post explores how to balance business priorities and resonate with customers by optimizing price

Understanding Customer Perceived Value

Perceived value of a product is how a customer assesses the worth of a product. This assessment is influenced by product's performance, affordability, innovation, brand, social message, or other attributes. If perceived value is higher than price, the product creates value for customers. Customer purchase decision is, generally, an outcome of this price - value equation

Typical retail shelf enabling comparison of price and value by buyers

Following a Scientific Approach to Optimizing Price:

This pricing approach divides all products into 2 categories. - Key value items or non - key value items

Key value items are those that drive value perception for the seller or brand, relative to competition. These products are usually traffic drivers with high sales velocity. If these products are not competitively priced, average sales per customer reduces. Hence, pricing objective for Key Value items is to maximise market share and value perception for the brand or seller

The key considerations for pricing non-Key Value items are mentioned below:

• Economic considerations: These include Cost structure of the product and Margin goals

• Competitor considerations: These include Customer market share and Value perception relative to competition. Its important to benchmark effective value to the customer vs competition, not just price

  
  

• Portfolio considerations: Each product variant within a portfolio is priced such that it offers a distinctive value proposition to customers

  
  

• Supply and Demand considerations: Price is used as a tactical lever to shape demand i.e. transfer demand from one product to the other. This approach is reactionary, brought on by inventory imbalance or unplanned demand disruptions  

  
  

Pricing Methodologies

To determine optimal pricing strategy start by defining business objective. Pricing logic can vary as follows, depending on business objective

Cost-Plus Pricing: This approach uses cost structure and margin aspiration to define selling price. It is used when priority is to protect margins

Value-Based Pricing: This approach sets prices according to the perceived value of a product. It is used when priority is to protect customer satisfaction

Competitive Pricing: This approach involves analysing your competitors’ prices to set your own. It is used when priority is to protect market share

Premium Pricing: This approach involves applying a premium over value-based price. It is used when priority is to protect brand positioning

Penetration pricing: This approach involves pricing to emphasize affordability. It is used when priority is to protect growth

Price skimming: This approach involves launching at a high price, progressively reducing price as demand ramps up. It is used when priority is to maximise earnings over the product lifecycle

Aligning Prices with Customer Expectations

Once you have chosen a pricing methodology, it's essential to align it with customer expectations. Here are some practical tips:

Conduct Customer Research

Engage actively with your customers through surveys, interviews, or focus groups. Pricing research can be done to identify:

• A/B testing: Experiment with different price points to see how they resonate with your audience and impact conversions

  
  

• Revenue maximum and optimal price: Plot demand versus price curve from a series of price experiments, check where the area under the curve is maximum 

• Combination of attributes customers will pay for: This research can be done through a statistical tool - conjoint analysis. Different combinations of product attributes, such as different features, components or design, are put before respondents to test their preference at stated price. Goal is to get statistically significant customer responses on which attributes they are willing to trade in favour of affordability

Is Your Pricing Strategy On Point?

Finding the right price that resonates with your customers is a continuous journey. It’s crucial to understand customer perceived value and utilize effective pricing methods. By consistently evaluating and refining your pricing based on customer insights and market conditions, you can fulfil expectations and enhance perceived value