Pricing Strategy: 7 factors marketers can leverage to increase sales (2024)
by Daniel Burstein, Senior Director, Content & Marketing, MarketingSherpa and MECLABS Institute
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Age might just be a number, but price is so much more. Human beings inherently have a hard time discerning the value and cost of things. They are not logic machines that see a dollar amount and instantly compute whether it is the exact right price aligning perfectly at the nexus of the demand and supply curves.
We’re inherently emotional beings driven by often unconscious triggers, signals and biases. And for many things we buy, we aren’t experts enough in that industry to know what a fair price should be anyway.
So how and when you present price can help customers better make sense of it. Many factors affect that perception of price. Here are seven factors to consider when building your pricing strategy.
Factor #1: When to present price
The order of price presentation can influence customer perception.
“In our work, we saw patterns of brain data suggesting that people change the way they shop for everyday products, depending on whether they see price tags before or after they see the associated product. When products came first, people seemed to be asking, ‘Do I like this?’ When prices came first, people seemed to be asking, ‘Is this worth the money?’” said Uma R. Karmarkar, Assistant Professor, Rady School of Management and School of Global Policy and Strategy, University of California, San Diego.
There isn’t a specific pricing order that works best for every kind of product. Customers evaluate different products in different ways.
“For example, if you ask someone, ‘Do you like these batteries?’ they might struggle to answer. Most people don’t think of batteries in terms of how much they like them, so they might be less interested in buying, even for a good deal. But suppose you ask, ‘Are these batteries worth $5?’ Answering that is much easier, particularly for a good price! In fact, we also showed that people were more likely to buy ‘functional’ or ‘utilitarian’ products like batteries and water filter pitchers when they saw the prices earlier in the decision process. We think this happened because the price-based question fit those kinds of purchases better,” Karmarkar said.
So your goal is to find the optimal time to present price to the customer.
The below video shows an experiment with a large sports entertainment provider that sought to increase conversion on its main landing page. MECLABS Institute (parent research organization of MarketingSherpa) helped drive a 97% increase in conversion by finding the optimal location of the price in the customer journey.
Pay special attention to where in the customer journey you present price when you are paying for traffic. If you don’t include price in an ad when you’re paying for clicks, are you buying low-quality traffic? If you include price and are the low-price leader in your market, will you get tire kickers only interested in seeing how much shipping costs? If your price is high in the market, will potential customers ignore your ad before they have a chance to learn about its value?
The Adlucent team set out to determine whether showing price in an ad on social [media] affects the performance of campaigns for a wellness brand. The ad with no price had a Return on Ad Spend (ROAS) of $0.50, while the ad with the price had a ROAS of $0.96. So having price in the ad resulted in a 93% increase in ROAS. “This could be because shoppers may already have a price-point in mind, and seeing the pricing upfront is a positive,” said Olga Rangel, Senior Account Manager at Adlucent.
Here is a look at an anonymized version of the ad:
The team also tested retargeting for the wellness brand, along with a woodworking brand and a mattress brand. “In retargeting, we noticed that price mattered more with products that had higher price points. There was not a significant difference with lower price points,” Rangel said.
For the mattress and woodworking brand, which both had an average order value (AOV) above $200, there was a lower click-through-rate (CTR) for ads with the price in the ad but a higher conversion rate (CVR) and ROAS. So less money was wasted on people clicking just to check the price.
“For retargeting [higher AOV products], including the price in the ad is beneficial because it gives the customer a better picture of what to expect. For a high-priced item, this makes it easier on the shopper who has been price comparing,” Rangel said.
As for how the price is displayed, there was no significant difference with putting the price in the ad caption versus as an overlay on the creative.
Factor #2: Price standardization
For services companies just starting out, sometimes the focus is on creating custom packages for each new client. However, that is difficult to scale.
Museum Hack offers “Museum Tours for People Who Don’t Like Museum Tours,” according to Elaine Glusac in The New York Times. In the tour company’s early days, the company would charge whatever it could for its team-building services, adjusting the service fee and actual activities to match client budgets. As the company grew and became more sophisticated, they realized this method was no longer sustainable and set standard pricing in each operating city with various options and upgrades at additional charges.
“This pricing model means that we do turn away some business that we would have accommodated before, but what we lose in those few deals we more than make up for in operational efficiency and reliability. This standardized pricing allowed us to reach $2.8 million in revenue, fully bootstrapped, which was enough to join the Inc 5000 in 2018 as one of the fastest-growing private companies in America, and then again in 2019,” said Michael Alexis, Director of Marketing, Museum Hack.
Factor #3: Order of different price levels
You can test the order that customers see prices. For example, the prices could be in ascending or descending order.
Software developer SpdLoad tested price order for a software-as-a-service (SAAS) company from most expensive on the left to least expensive on the right. They were testing loss aversion.
“For example, you are offered a package for $100 per month, which includes everything you need and more. Over $80, which has almost everything. Over $30, in which there is almost nothing. And free, in which [there is just] one function. It is unpleasant to lose, so [the customer] wants to take the more expensive package,” said Maksym Babych, CEO, SpdLoad.
This price ordering didn’t increase the overall conversion rate, but it did increase the number of purchases of the most expensive packages.
Factor #4: Shipping cost
For ecommerce marketers, shipping is a huge factor to consider for your pricing strategy. When we asked consumers how ecommerce retailers could improve the shopping experience, the top response for all groups was “provide free shipping.” For example, 85% of females age 65 and older identified free shipping as the top improvement for retailers.
Jeff Neal sells live insects to pet owners through Critter Depot. When the company first launched, they put a lot of effort into calculating shipping costs for customers. But the shipping calculators that were used to display the price for customers during the purchase were only right about half the time. So when the Critter Depot team actually printed the postage to ship, they noticed they often hadn’t charged customers enough for shipping in the website checkout process.
To make matters worse, there was a high bounce rate on the website once people got to the shipping calculator.
Now the company includes the cost of shipping in product prices and advertises free shipping. “It improved the customer experience because they know the exact cost for our product. Shipping has always been a hidden fee for online shoppers. We're eliminating that hated hidden fee and converting more visitors into customers,” Neal said.
Factor #5: Contract length
Many recurring revenue products offer a discount if the customer commits to a longer term.
“One of the best pricing lessons I learned was that many buyers are actually indifferent between annual versus monthly payments, and therefore having a monthly price that is significantly higher than annual (25% or more) will drive companies to annual plans, which of course is huge for your cash management,” said Phil Strazzulla, founder, SelectSoftware.
Strazzulla learned this lesson selling software to human resources (HR), a department that tends to have fixed annual budgets and cares much more about overall dollars paid in a year versus when they are paid, he says.
For example, if pricing options for a software were presented as $10,000 per year or $1,000 monthly (a 20% premium over the monthly rate), the vast majority of HR buyers will pay the $10,000 upfront. “This is great for the business as annual contracts have lower churn, higher success with implementation, and most importantly, put cash in the business’s pockets early,” Strazzulla said.
Factor #6: Competitor pricing
Your prices don’t exist in a vacuum, of course. And with the rise of the internet, it’s never been easier for customers to shop on price.
According to pricing software Prisync’s analysis of 295,377 e-commerce product prices in its database, the majority of companies set their prices based on competitor pricing. The team discovered that 36% of businesses pursue a pricing strategy that matches their competitors’ prices and 29% of ecommerce merchants pursue a strategy of beating their competitors’ prices.
“The majority of ecommerce businesses are leaning towards a highly competitive price [strategy] to attract and keep customers in this growing industry,” said Yigit Kocak, Inbound Marketing Manager, Prisync. “Retailers who want to succeed in this competitive landscape need to track market prices according to their product assortment.”
Factor #7: Price increases
Pre-announcing a price increase allows you to lock in business before the increase and prepare customers for the increase.
“In my experience, the best way to raise prices is to plan out a reasonable but intentional uptick in pricing (in our case, we're about to do one around 17%), and then promote the heck out of our existing pricing and push on it for three months rather than ‘a sale,’” said Cody Warren, SEO Specialist, Hook Agency.
The agency crosses out the future price in red and shows the specific date of the increase.
“It is an awesome tool for the salesperson, and he says this closes more deals than working for a similar company before who often changed up the offering and prices, confusing the customer,” Warren said.
Let's start with Myth 1: Prices ending in 7 (E.g. $97 or $99 instead of $100) Back in the 70's or 80's, a marketer called Ted Nicholas is said to have suggested that prices ending with the number 7, do better than other ending digits. This means that, theoretically speaking, you'd sell more at $9.97 than $9.99.
Pricing strategies refer to the processes and methodologies businesses use to set prices for their products and services. If pricing is how much you charge for your products, then product pricing strategy is how you determine what that amount should be.
Apple utilizes a minimum advertised price, or MAP, retail strategy. This strategy prevents retailers from pricing their Apple products below the MAP. By ensuring the price for Apple products never drop below a specific price, Apple can maintain their product popularity.
What is the rule of 7? The rule of 7 is based on the marketing principle thatcustomers need to see your brand at least 7 times before they commit to a purchase decision. This concept has been aroundsince the 1930swhen movie studios first coined the approach.
Pricing involves setting the price for a product or a service to maximize the profit, keeping in view the consumers' perception of the value, production price and the competitors' pricing. This is the toughest of the seven marketing functions since it involves an extensive understanding of the market.
Those factors include the offering's costs, the demand, the customers whose needs it is designed to meet, the external environment—such as the competition, the economy, and government regulations—and other aspects of the marketing mix, such as the nature of the offering, the current stage of its product life cycle, and ...
A pricing strategy takes into account segments, ability to pay, market conditions, competitor actions, trade margins and input costs, amongst others. It is targeted at the defined customers and against competitors.
What is the Premium Pricing Strategy? Premium pricing is the practice of setting a high price to give the impression that a product must have unusually high quality. In some cases, the product quality is not better, but the seller has invested heavily in the marketing needed to give the impression of high quality.
Skim pricing, also known as price skimming, is a pricing strategy that sets new product prices high and subsequently lowers them as competitors enter the market. Skim pricing is the opposite of penetration pricing, which prices newly launched products low to build a big customer base at the outset.
The rule of seven in marketing states that brands that engage with a customer seven times are more likely to earn the trust and business of that customer. Frequent communications allow the brand to build a relationship with customers, which is important for making sales and strengthening the brand.
The Rule of 7 states that a prospect needs to “hear” the advertiser's message at least 7 times before they'll take action to buy that product or service. The Marketing Rule of 7 is a marketing maxim developed by the movie industry in the 1930s.
The 7Ps model helps us to: Set objectives and provide a roadmap for your business objectives. Conduct SWOT analysis, and undertake competitive analysis. Review and define key issues that affect the marketing of its products and services.
It is a complex and difficult decision that cannot be made in isolation but needs to take into consideration all related factors – International Customers, Costs, Competitors, Culture, Channels, Currency & Comparability – the 7 C's of International Pricing discussed above.
Pricing portrays the value of your product. Some customers may judge low product prices as a poor quality commodity. Alternately, a high price may mean good quality but may drive away customers. Strategies of pricing help companies strike a balance and acknowledge consumers' wants.
The theory of factor pricing suggests that the individual costs for each factor, such as labor, capital, raw materials, land, and services, must be considered when calculating prices for a product or service. Factor Pricing Theory has two main components: risk and return.
Pricing is important since it defines the value that your product are worth for you to make and for your customers to use. It is the tangible price point to let customers know whether it is worth their time and investment.
raw materials, process materials, component parts, major equipment, office equipment and supplies, and business services. Identify seven factors that influence the price of a product. perception, competition, supply and demand,economic conditions, and product life cycle.
What are the three major factors affecting pricing decisions? Customers, competitors, and costs influence prices through their effects on demand and supply; customers and competitors affect demand; and costs affect supply.
Three important factors are whether the buyers perceive the product offers value, how many buyers there are, and how sensitive they are to changes in price. In addition to gathering data on the size of markets, companies must try to determine how price sensitive customers are.
The four Ps are a “marketing mix” comprised of four key elements—product, price, place, and promotion—used when marketing a product or service. Typically, businesses consider the four Ps when creating marketing plans and strategies to effectively market to their target audience.
Electronic products – take the Apple iPhone, for example – often utilize a price skimming strategy during the initial launch period. Then, after competitors launch rival products, i.e., the Samsung Galaxy, the price of the product drops so that the product retains a competitive advantage.
Luxury labels' pricing strategy is value-based, backed by the superiority of their products and the willingness of their customers to pay. They emphasise quality and durability above all else. This includes a focus on superior materials and expert production among other things.
A high-low pricing strategy is a common retail pricing strategy where a product (or service, in some cases) is introduced at a higher price point, and then gradually discounted and marked down as demand decreases.
Dynamic pricing is also known as surge pricing or time-based costing. Firms use this strategy to assess current market requirements and set adaptable prices for products and services. In a sense, it's a form of pricing discrimination.
Neutral pricing, the most common pricing strategy, means that you price so that your customers are relatively indifferent between your product and your competitor's product after all features and benefits, including price, are taken into account. Of course not all customers will be indifferent.
a pricing strategy in which a company sets different prices for the same product on the basis of differing customer type, time of purchase, etc; also called Discriminatory Pricing, Flexible Pricing, Multiple Pricing, Variable Pricing.
Internet marketers keep pricing their stuff with prices ending in 7 because of the herd mentality. They're all just following each other blindly. But, that's not to say there isn't a herd mentality to pricing. There is something to be said for pricing your product using prices that your customers are used to seeing.
Research has since expanded, concluding that if you want to be perceived as a “luxury” good, then your prices should end in an even number, such as 0 or 5. If you wanted to be perceived as discounted, then you end prices in an odd number, like 7 or 9.
This strategy, often called "charm pricing," involves using pricing that ends in "9" and "99." With charm pricing, the left digit is reduced from a round number by one cent. We come across this technique every time we make purchases but don't pay attention.
A price's ending consists of one or all of the rightmost digits of a price and can be manipulated more or less independently of the level of the price. For example, the prices, $29.95 and $30.00, have different endings, but are at virtually the same level.
The Japanese script for the number 8 has the shape of a mountain (“Sue Hiro-gari” in Japanese), signifying the concepts of fanning out, growth, and “to become more prosperous as time passes.” Because of this positive connotation, prices in Japan, too, tend to lean, towards 8-endings.
As the research expanded over the years, economists essentially found that if you wanted to be perceived as a luxury good you ended your prices in 5 or 0 and if you were more of a discount good or wanted to be perceived as a deal, you'd end your prices in a 7, 8, or 9.
“Odd pricing” refers to a price ending in 1,3,5,7,9 (e.g., $9.93). “Even pricing” refers to a price ending in a whole number or tenths (e.g., $20.00 or $20.50). Odd pricing tends to be more popular because it indicates a deal in a customer's mind, making them more likely to buy.
The rule of nines is a popular method of charm pricing to increase sales. This method uses a nine, usually at the end of the price, to help sell a product. Think about that sale price of $49.99. This price is seen as $49, not $50 and, as a result, is more attractive to customers.
Ever notice that stores seem to always price their items ending with a 99, 97, or a 95? It's called 'Charm Pricing' and it's a strategy that's based on the belief that the price of something, has a psychological impact on us.
Rounding uses the absolute difference between the original price and amounts close to it with the required ending. Applying the Nines method to the amount 9.70 will round it up to 9.99, since between 8.99 and 9.99, the latter is closer.
Odd-even pricing is a pricing strategy involving the last digit of a product or service price. Prices ending in an odd number, such as $1.99 or $78.25, use an odd pricing strategy, whereas prices ending in an even number, such as $200.00 or 18.50, use an even strategy.
The reason for keeping such prices is a pricing or marketing strategy. There is evidence that consumers tend to perceive such prices(also known as odd prices) as being significantly lower than they are actually, tending to round them up to the next lowest monetary unit.
Some argue that consumers tend to focus on the left digits, rounding the .99 down (e.g., viewing $18.99 as $18). Others say that consumers pay attention to the . 99, rounding the price to its nearest whole number, perceiving the small difference as a discount, or even associating the .