In terms of marketing, pricing is crucially important because of the signal it sends to customers about where we sit in a competitive marketplace. By choosing any price point, we send a message to customers. The price may be decided internally, within the business, for economic reasons. At the same time, the marketing perspective says that we must look at things from the point of view of the customer. And what the customer sees is not the internal financial calculations, but a price that’s higher than competitor X, and lower than competitor Y.
In other words, the customer quickly makes a judgement about our products from the information we give them through the price. This pricing information places us, and our products, at a certain point in relation to the alternatives.
So, pricing is simultaneously about two different things:
Many early-stage businesses that haven’t yet established a reputation – and are perhaps desperate for revenue – feel that they can’t charge a high price. But by charging a low price they’re sending a signal that implies that their product is not as good as the alternatives. They are actually undermining their own brand, and setting a precedent that will prevent them from increasing prices in the future. Yes it’s a kind of Catch-22. Businesses often don’t know what to do in this situation.
My advice is based on the understanding that pricing is about two separate things, as described above; it’s about both the financial transaction and a signal of value. By recognising these two factors we can develop a dual strategy if we need to sell cheaply as a short-term tactic. The invoice supplied to a client at the point-of-sale can have two prices – or at least, it can say two things. It can say that the real value is (for example) $1,000. Then it can indicate that there is a discount on this occasion of 50%, for example as a goodwill gesture to a new customer, or because this is a special project. As a result of the discount, the bottom line is actually $500 and this is the amount of the financial transaction. On one invoice we have said two things. We have said that on this occasion we will sell the product for $500, but we also made absolutely clear that the real value is $1,000.
The benefits of this are several.
The first is that the customer realises that they are getting a bargain – and everyone likes a bargain! Secondly, it prevents the discounted price setting a precedent. If the customer returns for a repeat purchase they don’t expect that the next sale will be $500 because, after all, this isn’t the proper price. And if the customer needs reminding in the future, they can be referred to the earlier invoice that clearly states that the normal price is actually $1,000. Thirdly, when the customer recommends us by word-of-mouth we don’t want them to tell their friends and colleagues that they should also expect a price of $500. What we actually want them to say about our product is that they were delighted and the true value is $1,000. This encourages others to buy at the full price. If they do happen to mention that they paid only $500, they are much more likely to also say that they were lucky enough to get an exceptional discount and the normal price is actually $1,000. In this way, we can achieve both our objectives simultaneously: a sale and a signal of high-value.
This is a tactic that might have to be used by early stage businesses. As soon as realistically possible we need to charge the full price consistently.
Key Points
Pricing is about two things: the economic transaction and a statement of value. If you give a discount for any reason, you should still state the full value. This is important for future reference and to ensure the customer fully values your product.
What to do next