We’re at the seventh inning stretch in our series on types of pricing strategies! So far we’ve touched on Cost Based Pricing, Competition Based Pricing, and Customer Based Pricing. Our last blog reviewed a couple of forms of Customer Based Pricing, and this post will round out that topic with some final examples.
With Customer Based types of pricing strategies, the seller makes decisions based on the estimated value of the product or service from the customer’s perspective. I have included the following as examples of Customer Based Pricing as I see them as having a buying decision driven by customer value.
Bundled pricing combines two or more (usually similar) products in the same offering, with pricing lower than if the items were sold separately. Some common examples would be cable television where additional (usually themed) channels would be offered with basic cable, or the ever-popular McDonald’s Happy Meal. Bundling is a great tool to increase perceived customer value, and is particularly effective when a more popular product is teamed up with a less popular item.
Every Day Low Pricing (EDLP) versus High – Low Pricing
In order to price effectively, it’s important to understand both what our customers are willing to pay, and how they want to purchase. For example, many retailers use pricing as a means of positioning their store banners and differentiating themselves from competition. Two of the more popular approaches are EDLP, where the product is at a (relatively) low price all the time, and High – Low, where the product carries a high regular selling price, but is discounted or featured at a lower price on a somewhat frequent basis. In an EDLP environment, setting prices on a net basis would likely be preferable to running periodic ‘deals’, which would better fit the High – Low approach.
With a Freemium acquisition/ pricing strategy, a simple or basic service is offered for free, and the customer has an option of paying a premium for more advanced versions with additional features. The Freemium model is often applied to software and Internet based services such as Skype and LinkedIn. This strategy works particularly well for companies just establishing themselves as it allows for early customer acquisition (free) and provides options for downstream revenue based on a) premium services, and b) some form of monetization based on the size of the user base (example – advertising revenue).
Pricing is made more complex by the numerous strategies available. These are just three pricing options illustrative of customer oriented product offers and customized solutions, with more to follow. While it would be easy to argue whether an element was a strategy or a tactic, suffice it to say that there is significant cross-over in terminology and application.
As you review each pricing method, think about your situation and how to leverage the power of pricing to your benefit. It’s true that pricing represents the fastest way to grow the bottom line. It provides more leverage than reducing costs or growing sales volume. While you’ll need to apply analytical rigor and strategic objectivity to this complex area, the rewards of a pricing focus will emerge quite quickly.
If you are interested in discussing how pricing can impact your organization, please contact Boardroom Metrics 1.416.994.6552