Most of the time we think about pricing a single product (or service). When we do it well, we think of value based pricing – how much is the next best alternative and how much more or less value do we offer through differentiation. Perfect!
Perfect, except that much of the time the pricing game should be much bigger than this. Grocery stores often charge very low prices for milk, and advertise that low price, to attract shoppers to their store. This loss leader helps the grocery sell products that have much higher margin. Notice, when pricing milk the grocery doesn’t use simple value based pricing, because the game is much bigger than just milk.
Selling multiple items to a single customer is very similar to the grocery store. The goal should be to maximize overall profitability with the customer, not profitability on each item. You may need to offer deeper discounts than you would like on some items to make your customer happy. Do it, as long as you are getting significant additional business at prices that make up for your deep discounts.
How about freemiums? What a horrible pricing strategy on its own. After all, how do you make money with free? Well, you make money with free when you think about the bigger game of pricing. Free attracts attention and trial to help convert to paid. Of course you knew that, but you probably hadn’t thought of it in terms of pricing.
A second example of the bigger game of pricing is for customers who buy multiple times. We have discussed in the past how you don’t want to use simple value based pricing on your most loyal customers because if you upset them, and you will, you will lose a lot more revenue than any amount you could have made optimizing the price for each transaction.
This blog usually touts the simplistic mantra – use Value Based Pricing. Value Based Pricing is fundamental to understanding your customers’ decisions. But many times to optimize profits you must think of the bigger game. Ask yourself, what other customer decisions are linked to this one purchase decision? Here you read about two general situations where other decisions are linked: additional products and future purchases. You should definitely be thinking of these two. Can you think of others?
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Mark Stiving, Ph.D. – Pricing expert, speaker, author
Photo by briancweed