Pricing Strategy Part 3: The Strategy
Choosing a Pricing Strategy should follow your overall Business Goals. Are you looking to increase market share, increase revenue or increase profitability? Over 12 Pricing Strategies to choose from.
This is a continuation from the Pricing Strategy & Psychology - Understanding the Art and Science behind Monetisation article.
Your Pricing Strategy should align with your overall Business Goals.
Your Company Wide Strategy, then your Product Strategy and finally your Pricing Strategy.
Or rather ask yourself, how can your approach to pricing support the Product Strategy or Company Strategy?
Learn how to put this into practice with the Pricing and Monetisation Strategies Masterclass
Are you looking to grow users, reduce churn, increase profitability or increase revenue?
Then consider, how might your Pricing Strategy support those business goals.
If you’re looking to grow users quickly, grow market share, then consider a pricing strategy that makes it easy for customers to say yes and purchase your product.
If you are already a market leader with dominant market share, or where there is minimal competition, that wants to grow cash reserves to enter a new market or for another endeavour, consider how to grow your profitability or revenues.
Increasing revenue from the existing base may allow you to achieve this goal. Alternatively, think of how your product and pricing could encourage these users, tap into their motivation, to bring other users to your product and increase your revenue that way. Is there a growth loop that rewards loyal users for referring others to join a product they love?
There are infinite ways to achieve your business goals.
So what does this all mean?
Start with your positioning and overall company strategy.
Positioning & Strategy
1. Penetration (Land & Expand)
If your strategy is Penetration (Land & Expand), your aim is to increase market share as quickly as possible. Gaining first mover advantage. Before competitors enter or new technology renders your product ineffective. Sometimes the window of opportunity is limited because there is a new tech coming out or regulatory change or other change that means first movers gain a massive advantage.
Social media or network based products do this really well. Growth means tapping into the network effects and stickiness of the product, making it harder to switch.
When your school uses Facebook groups and all announcements happen there, you’re not going to close your Facebook account.
When TikTok is where all your friends are, where your peers are posting updates, you can’t leave.
Likewise, with Instagram. If Instagram is where your cousin in the UK is posting photos of your favourite niece, you’ll be stuck on that platform just to engage with her updates.
And if your organisation updates everyone via slack, then you better have Slack on your laptop and mobile so you never miss a message. Same with Miro, Mural or Jira.
These products are designed to tap into the network effects, whether they’re consumer based or business based, to grow and become sticky. Once users are on these platforms, leaving is hard. Being the first mover in your category to solve their problem (communication, productivity or other), means you win market share and your customers find it hard to leave (hostages?).
2. Maximisation
If your strategy is Maximisation, you’re most likely in a saturated market where there is not much difference between short term and long term price. Your aim is to maximise revenue with subtle increases in Price. Customers are less likely to switch for a small increase (because they love the product, are a huge fan of the experience or they are in too deep to switch).
These are often commodity products. Customers need their phone, internet, electricity, insurer, mortgage to just work. The cost of switching is perceived by customers to be high.
Switching costs are seen as high, because:
Customers spent a lot of time signing up to the product in the first place and they dread doing it again. Setting up these services may have taken hours to begin with, or required a lot of information and days to complete, like a loan or mortgage.
Customers may fear service disruption. What if something goes wrong, what if my number isn’t ported across correctly, what if I have no connectivity while it switches over and I can’t use data to work from home or my electricity isn’t working and I can’t use the kitchen?
Customers may fear losing something that they currently have from their existing provider. What if I lose data, voicemail messages, member status or points or incur other penalties? It becomes a trust issue, where it’s better the devil you know.
The cost of switching needs to feel too high to be worth it for these customers in your market to be able to succeed using the Maximisation strategy
Companies like Utilities, Energy, Telco, Banks focus on how to maximise their revenue with this strategy. Pulling the pricing lever to increase revenue.
3. Skimming
If your strategy is Skimming, you’re aiming to price your products at a premium to capitalise on early adopters, valuing new innovation or those with a fear of missing out who have a high willingness to pay. An example are Apple fans who line up and pre-order the latest iPhone.
Understanding your customer motivation and behaviour can allow you to take the premium pricing route. Your customer may want to be first in their social circle to use your product. They may want the status of having introduced their friends to your product. They perceive a high value from your product and will pay a premium for it.
Over time, you may reduce the price to attract a larger customer base but targeting the early adopters allows you to generate high profits in the early phase of your product. We saw this with customers lining up overnight or crashing the Ticketek website trying to secure Taylor Swift tickets.
When I first launched the Telstra hiptop, the first phone with an app store (2006), customers lined up overnight in the middle of George st Sydney. This product launched at least 2 years before iPhone and Android and was the first phone that incorporated gaming and social networking. It had a cult following among celebrities and was featured in multiple movies and shows the targeted users watched. With the novelty of being the first product with this capability, people under 30 years old, lined up overnight.
It could have followed a Skimming approach with the hiptop, but as our goal at Telstra was to grow the users under 30, a segment we had not been successful with before, the pricing strategy chosen was Penetration. The pricing plan Unlimited data with limited voice and text. Data used while playing apps, downloading apps, chatting via social networks was all included. The result was a run rate of thousands per week and a high acquisition of new users in the segment we were aiming for. New users could then be offered an iPhone or Android once those products launched.
Pricing Strategies and Tools
Depending on your industry, target market and business model, these are some common revenue strategies:
Pricing Strategies
1. Cost-Plus Pricing
Setting prices by adding a markup to the cost of producing or acquiring a product or service.
A lot of small businesses choose this option without thinking about how customers perceive the value of their product. This may mean they’re leaving money on the table.
2. Value-Based Pricing
Pricing based on the perceived value of the product or service to the customer, rather than just the cost.
Think how DeBeers prices engagement and wedding rings based on the value end users place on the product. From a job to be done approach, value based pricing maximises the price your end users are willing to pay.
3. Dynamic Pricing
Adjusting prices in real-time based on factors like demand, time, and customer behavior.
A great example of this in practice is how Uber prices. Surge pricing during peak events or peak periods.
4. Price Discrimination
Charging different prices to different customer segments based on their willingness to pay.
Before attempting this, check your regulatory obligations. In Australia, pricing a telephone service in rural areas versus urban highly populated areas is not an option legally for organisations. Other countries may have other laws. Customers may not see this option as fair especially if it’s the exact same product.
Market Expansion
5. Market Penetration
Increasing market share by offering existing products to existing markets.
Taking your product and offer to where those users are.
6. Market Development
Introducing existing products to new markets or customer segments.
7. Product Diversification
Expanding revenue streams by offering new products or services to existing customers.
Subscription and Recurring Revenue Models
8. Subscription Services
Offering products or services on a subscription basis, where customers pay regularly (e.g., monthly or annually). You can incentivise the upgrade to Annual subscription with more value (higher discount, more inclusions - focus on what your user values).
9. Membership Models
Charging customers for exclusive access or benefits over time. Again focus on what your end user values to make this worthwhile.
10. Software as a Service (SaaS)
Providing software on a subscription basis rather than as a one-time purchase. One of the great vehicles of PLG or self serve adoption with reduced time to value.
Freemium and Upselling
11. Freemium Model
Offering a basic version of a product for free and charging for premium features or upgrades. Canva, Miro, Slack all follow this approach. Users within the product can unlock premium experiences through in-product upgrades.
12. Upselling and Cross-Selling
Encouraging customers to upgrade to higher-priced plans or purchase additional products or services.
Other ways to Monetise
You may not even charge your users directly for your product. There are multiple products that exist to solve a problem but the end user may not necessarily pay for the product. Think of services that your health insurer would like you to use that could reduce the health insurance costs to them. Health insurance as a product has a huge cost. People who need it, value it are often more expensive for providers to deliver to. Their payback period is long. What they need is for people to stay healthy and fit so that they can avoid chronic and expensive illnesses that the cost to insure is high. For products that can help people improve their health - fitbit, health apps - insurance providers are the customer
Other ways to monetise include the following.
Advertising and Sponsorships
Advertising Revenue: Earning income by displaying ads on websites, apps, or other platforms.
Sponsorships: Partnering with other businesses or organizations to sponsor events, content, or products.
Licensing and Intellectual Property
Licensing: Allowing other companies to use your intellectual property, such as patents, trademarks, or copyrighted content, in exchange for royalties.
Franchising: Expanding by allowing others to operate businesses using your brand and systems in exchange for fees.
Data Monetization: Selling data collected from customers or business operations to other companies or researchers.
Strategic Partnerships and Alliances: Collaborating with other businesses to create new revenue opportunities, expand distribution, or enter new markets.
This is a follow on from the Pricing Strategy Part 2: Product.
Next up is Pricing Strategy Part 4: Psychology.
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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