Pricing Strategy & Psychology - Understanding the Art and Science behind Monetisation
Understanding Pricing is understanding customers' perceived value of your product, willingness to pay, in the context of the market alternatives, monetisation strategies and communication psychology.
As a Product manager, knowing your customer’s perceived value of your product is the first step in Pricing Strategy. Pricing - one of the 4 P’s of Marketing - is essential to understand for Product Managers.
There is no point in solving a painful problem for customers, if you don’t understand the art and science behind setting a price for your product, how to message or communicate the value your product brings to your customer and use the language that your users are using.
As Peter Drucker once said: “Customers don't buy products. They buy the benefits that these products and their suppliers offer to them.”
Why Pricing Strategy is Important
Pricing strategy is important for both businesses and customers. For businesses, it serves as a potent tool to accomplish their broader strategic objectives - increase revenue, acquire new customers, grow profitability.
For customers, pricing acts as a signal of the value they can expect to receive from a product or service.
A 1% improvement in pricing can result in an 8% increase in operating profit for a company with average economics, as revealed by Bain & Company. This statistic underscores the impact pricing can have on a business's bottom line, making it an indispensable aspect of any business strategy.
On the customer's side, pricing communicates the perceived value of a product or service. When customers see a higher price, they often associate it with better quality or additional benefits. Lower prices can signal affordability, attracting budget-conscious consumers.
A well-crafted pricing strategy not only influences a customer's purchasing decision but also shapes their perception of the product's worth.
Think about your own purchasing decisions and your perceptions of products purchased at Kmart or David Jones. Or even the value perceived at a 5 hatted restaurant over ordering your meal at a drive through at McDonalds.
Pricing as a Science and an Art
Setting pricing (whether we’re talking pricing structure, pricing offers or the price itself), combines both science and art.
What does that mean?
Let's first look at the Scientific side of understanding what price should be set for your product.
Pricing as a Science
There are 3 things to understand here:
1. The Customer & their Perception of Value
The customer’s understanding of the value that your product provides in the context of the market, past experiences, competitor and alternative or substitute offerings. Like with Product Positioning, context is important.
Finding the customer that values your product above others is the key. To understand this, we need to look at the science behind product value perceptions, price elasticity and willingness to pay.
Read more with Pricing Strategy Part 1: Customer
2. The Product & How best it meets or exceeds the customer’s perception of value
Through customer research you can then map the benefits your customer values from your product against the benefits of competitor or alternative products. This is crucial if you want to make sure your product is solving real problems your customer has rather than blindly copying competitors. Mapping the matrix of competitive advantage is key.
Read more with Pricing Strategy Part 2: Product
3. Pricing Strategies to choose
The possible pricing or monetisation strategies to take that align with your current position and targeted business strategy. No point choosing a pricing strategy that doesn’t align with the overall business goals.
Read more with Pricing Strategy Part 3: Pricing Strategy
Pricing as an Art
4. Pricing as an Art or Pricing Psychology
Finally looking at pricing and how to position, communicate or message as an art and tapping into the psychology of your end user.
Read more with Pricing Strategy Part 4: Pricing Psychology
I’ll go through how to create and execute a pricing strategy so that your product achieves your business goals over the next few articles. Starting with Pricing Strategy Part 1: Customer
Learn how to put this into practice with the Pricing and Monetisation Strategies Masterclass
Want to know more about Pricing Strategies and what’s the right one for your product and context? Drop me an email at irene@phronesisadvisory.com