Pricing is not simple. There are so many unique characteristics, so many factors to consider.
One way to make pricing easier to understand is to use a framework on how to think about it. Our pricing framework has 4 components, listed in order of their importance.
- Immutable laws of pricing
- Price (customer) segmentation
- Product categorization
Some immutable laws of pricing are necessary to make sure we are all thinking the same way. The most important one discussed so far is YOU create the value, pricing only captures it. We will add more over time, but this one is the most important for you to understand while we start. Think of these laws as describing the pricing environment and everything we do will fit within it.
Price segmentation is the first and most profitable pricing technique almost any business can use. It is the process of figuring out which customers are willing to pay more and creating mechanisms that get them to do so. The next post will introduce this and start you thinking along those lines.
Every product (or service) needs a purpose. Why do you offer it? Once you’ve defined the reason you sell a specific product or service, you can create a price that is consistent with this reason. One example is that a grocery store advertises their very low price of milk to attract shoppers into their store, so milk is a loss-leader. Over time we will define many purposes a product can fulfill.
The last category, Tactics, is a catch all where we will discuss miscellaneous pricing techniques like when to use 99 cents at the end of a price. These are fun, but typically much less important than customer segmentation or product categorization.