Five Steps to a Winning Pricing Strategy

When it comes to business growth, many companies focus on acquisition over sales. Yet, studies have shown that small changes in pricing can lead to a major effect—raising or lowering revenue by 20-50%.

This is despite the fact that even amongst large Fortune 500 companies, fewer than 5% have a dedicated practice of setting the best price possible. The result? Missed opportunities for growth.

Keep reading to learn how you can price for profit - and avoid common mistakes. 

Five Steps to a Winning Pricing Strategy 📈

Pricing is more than just a mathematical calculation. It involves considering the value your product or service offers to customers and the incentive they have to buy.

By focusing on maximising the gap between perceived value and price, you can create a compelling proposition that attracts customers and helps your business thrive.

Pricing as Value Minus Incentive

Rather than thinking of price as cost plus a margin, consider it as the value to your customer minus an incentive to buy.

This value-based approach, as described by Robert Dolan, emphasises the gap between price and perceived value as the primary factor in a customer's decision to purchase.

Gross Margin and Incentive to Sell

The gross margin, or the gap between price and cost, is essential for a business's sustainability. However, Dolan emphasises that the gap between price and perceived value, which he calls the incentive to buy, is even more critical in driving customer purchase decisions.

Maximising the Gap

Marketing plays a crucial role in making the gap between perceived value and price as large as possible. By enhancing the perceived value of your product or service, you create a significant incentive for customers to choose your offering over competitors.

Increasing Perceived Value

Rather than lowering the price, focus on raising the perceived value for your customers. This can be achieved by adding features to your product, creating tiered assortments (such as good, better and best options), and improving your product marketing.

Perceived Value Factors

Perceived value is influenced by a combination of intuition, rational analysis, and aversion to loss. Understanding your customers' preferences, needs, and perceptions will help you align your pricing strategy and product offerings to maximise the perceived value and drive sales.