Product Pricing Strategies: 12 Techniques for Optimizing Pricing
By Brett Farmiloe
From simplifying your pricing system to remembering to factor in shipping costs, 12 business leaders share best practices for pricing your business's product or services.
How to price your product
1. Simplify your pricing system
"One pricing mistake I made in one of my other companies was having too many price points. We were a service-based business, and pricing varied based on event type, location, and group size, for example.
"We soon found that it took up a significant amount of our sales team's time to explain the differences in pricing and the reasoning behind the nuances. To improve the experience for both our customers and our staff, we launched a tiered pricing system with three simple pricing types rather than dozens of individually priced products. This approach attracted and converted more customers and cut down on conversation time between sales reps and clients."
—Michael Alexis, swag.org
2. Avoid charging too little
"During the early days of my previous startup, I made the mistake of charging too little for my product. It was too good of a deal, and many people took advantage of it. I found myself overworked and not making much profit. I eventually realized that I needed to raise my prices to a more reasonable rate, and it took a few years, but I eventually got to where my business was very successful."
—Matthew Ramirez, Paraphrase Tool
3. Limit frequent discounts
"You want discounts to entice a customer to make a purchase within a specific time period. If you offer discounts too often, customers will know to hold off and wait for another promotion that will come up soon, and this reduces the sense of urgency to purchase and get a good deal. This can end up making your sales cycle longer and can cause issues with revenue and cash flow."
—Jenna Nye, On The Strip
4. Beware of unlimited offers
"If you offer unlimited anything, people can and will take advantage of it, particularly if it's a service. Unless you've done an in-depth analysis and priced your service appropriately, offering unlimited access to something can sink a company, particularly when you're trying to grow it."
—Beverly Gearreald, Transizion
5. Don't underestimate the costs
"As a small business owner, one pricing mistake I made early on was underestimating the true cost of a job and not factoring in all the expenses involved. I made the mistake of pricing my services too low to be competitive and attract more customers. However, I soon realized that this pricing strategy was unsustainable and was hurting my profits in the long run.
"To avoid making the same mistake, I would advise other startup leaders to take the time to calculate all the costs involved in a job, including labor, materials, overhead, and any unforeseen expenses. It's important to set a fair price that reflects the true value of your services and ensures that your business remains profitable. Remember that it's better to charge a higher price upfront than to underestimate costs and end up losing money in the long run."
—Todd Lannen, Lannen’s Lawn & Sprinkler LLC
6. Conduct audience pricing research
"One pricing mistake I've made is not doing pricing research with our audience. Your audience can give you value pricing feedback if you ask the right questions:
- What's a price so exorbitantly high that it would be a non-conversation starter?
- What's a price so low that you would question our credibility as a business?
- What's a price that's a little hefty but could be reasonable if you could see the value?
- What's a price that you would think is a great deal, but not suspiciously cheap?"
7. Factor in shipping costs
"One pricing mistake I have made is not considering the costs of shipping and handling when setting the prices of my products. This oversight led to lower profit margins and even resulted in a loss on certain sales.
"To help other startup leaders avoid this mistake, I recommend carefully calculating and factoring in shipping costs when determining product pricing. This includes considering not just the shipping fees, but also the costs of packaging materials and any additional labor required for handling the orders. By ensuring that all costs are accounted for in the product pricing, an
e-commerce business can maintain healthy profit margins and avoid unexpected financial setbacks related to shipping expenses."
—Damjan Tanaskovic, Localizely
8. Develop buyer personas
"When we launched our first product, we used a very amateur means of pricing it. Essentially, we looked at what competitors were charging and made our best guess as to what our 'typical buyer' would be willing to pay.
"Looking back, it was a hysterically poor means of developing a pricing strategy. And the biggest failure in all that was not developing buyer personas. Every company serves a distinct segment of their market, with customers that have widely varying purchasing behaviors and preferences. Thus, it’s crucial you invest time and money into building buyer personas for your product that will inform your pricing strategy.
"You can't just guess what your typical buyer looks like. You need to build out a dataset based on perceptions of your products, varying price levels, pricing sensitivity, and more. Once you have buyer personas with detailed data, you can then use that info to back into a weighted-average pricing structure."
—John Ross, Test Prep Insight
9. Localize pricing globally
"One mistake that we nearly made early in our business was not localizing our initial pricing when we moved into the global market. In our haste (and excitement) to expand, we assumed that customers around the world would pay similar prices to those domestically. However, this was not always the case, especially when you compare America to a smaller country like Thailand, and we soon wizened up to exchange rates and local competing product pricing.
"When expanding globally, you need to consider cultural differences between markets and adjust your prices accordingly for each region or country you are targeting. You also don't want customers to feel like they’re being overcharged because of currency conversion fees alone."
—Alister Wood, VisitUs
10. Embrace varying profit margins
"Unique products have different margins, which you should lean into rather than try to resist. By trying to create a uniform profit margin, we found some prices would misalign with consumer expectations and market competition.
"Now, instead of trying to create a uniform profit margin, we base our margins on our target market’s needs and their price sensitivity. Of course, we need to keep a base level of profits to run successfully, but we lean into higher or lower margins that align with customer needs."
—Shawn Plummer, The Annuity Expert
11. Consider client perceived value
"At the start of our company’s journey, we were young and pretty inexperienced with pricing. One mistake we made was to focus solely on profit margins and not place enough emphasis on the client's perceived value. We initially priced our development and design services at a premium level to make the most profit, assuming that clients would pay such prices because 'we said so.' However, we soon realized that our target audience consisted mostly of price-sensitive startups and SMEs with strict budgets.
"To rectify this, we did proper market research and adjusted our strategy to focus on perceived value, rather than profit margins, offering transparent pricing with no hidden fees. We improved customer retention rates while maintaining reasonable profit margins."
—Michael Chepurnyak, Ein-Des-Ein
12. Evaluate free trial strategies
"We create video content for SMBs. We started with a freemium model [offering basic services at no cost; charging a premium for advanced features] with the aim of increasing our conversion rate from free to paid users. After testing various pricing models, we then implemented a free trial.
"However, we soon realized that free trials were not effective when targeting SMBs or B2C customers. While we did observe a significant increase in user engagement after implementing the free trial, we also noticed that many users were taking advantage of the offer and generating content without converting to paid customers. Also, the churn rate increased significantly. Ultimately, we switched back to our freemium model and saw a return to positive results."
—Vitalii Romanchenko, Elai.io
About the Author
Post by: Brett Farmiloe
Brett Farmiloe is the founder and CEO of Terkel, a Q&A site that converts insights from small business owners into high-quality articles for brands.
Company: Terkel
Website:
Terkel.io
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