Smarter Pricing Strategies Drive Higher Sales and Profits
Most executives believe lower prices mean higher sales. But this is only true in limited cases. When companies apply the traditional demand curve too broadly, they often hurt themselves. Recent studies reveal subtle, important factors in buyers’ willingness to pay. The typical demand curve you learn in business schools only applies when:
Products are identical with no meaningful differences.
When products are identical with no meaningful differences, it becomes difficult for consumers to choose one over another. This can lead to a price war between companies, where they try to undercut each other's prices to attract customers. For example, in the market for basic household cleaning products like bleach, many brands offer the same active ingredient and concentration, making it hard for consumers to see any significant difference in performance. As a result, brands may resort to cutting prices to attract price-sensitive customers.
Payment terms are the same.
When payment terms are the same or identical, it means that all customers are given the same payment options and timelines, regardless of their purchasing history, payment behavior, or order size. This can lead to missed opportunities for maximizing profits or incentivizing good payment behavior from valuable customers. For example, a small business that offers the same 30-day payment terms to all customers may not be able to incentivize larger or more frequent orders with favorable payment terms, which can lead to missed opportunities for growth and increased profitability.
Buyers are perfectly rational, constantly weighing price and value.
The assumption that buyers are always perfectly rational and make decisions based on price and value alone is often made in economic theory. Still, it does not always hold up in reality. While buyers may aim to make rational decisions, many factors, including emotions, personal preferences, and social influences, can influence their decision-making. For example, a buyer may choose to purchase a more expensive brand of clothing because they value the brand's image and status rather than simply weighing the price and quality of the product. Or, a buyer may choose to pay more for a product because they have a personal connection with the seller or believe in the seller's mission or values. In both cases, the decision-making process is not solely based on rational analysis of price and value.
Buyers know all their options.
Assuming buyers know all their options can be a common mistake businesses make. It is not always easy for buyers to be aware of all their options, especially in complex markets with many different products and services. This assumption can lead businesses to underestimate the importance of marketing and educating potential customers about their products or services. For example, if a small business assumes that buyers are aware of all their options, they may not invest enough in advertising or creating an online presence, which could lead to missed opportunities for sales. Therefore, businesses must make a conscious effort to educate potential customers about their products or services.
Most markets have differentiated products, innovative payments, irrational buyers, and imperfect knowledge. In B2B and many consumer markets, product differences help buyers achieve their vision of satisfaction and determine their willingness to pay, leading to higher sales.
Buyer Value Perceptions
Aligning price structures and levels with buyer value perceptions improves price performance and boosts sales. When your price reflects buyer values, you become their preferred vendor, justifying higher prices.
Apple exemplifies this, with 9.8% PC share but over 50% of profits. Under 50% smartphone share but 85% of profits. Apple offers varied prices but never competes on price. They serve select customers better and better, clearly showing this strategy’s success.
Any company can adopt this pricing strategy that generates higher sales by applying the following:
Determine your differentiators—why customers choose you.
This is crucial for companies to create a unique selling proposition that sets them apart from competitors. These are the reasons why customers choose to do business with you instead of your competitors. Differentiators can be product-related, such as superior quality or unique features, or service-related, such as exceptional customer support or a more convenient ordering process. One example of a company with a strong differentiator is Apple, which is known for its innovative product design and user experience, setting it apart from other technology companies.
Find segments willing to pay more for those differentiators.
These segments are your target market and will be the most profitable for your business. For example, a car company may have a differentiator in their vehicles' advanced safety features. They can find segments of customers who highly value safety and are willing to pay more for it. These customers may be parents who prioritize safety for their families or individuals who have experienced a car accident and want to avoid it happening again.
Learn their value drivers, purchase drivers, and price drivers.
Value drivers are the specific features or benefits of your product or service that the customer places the most value on. Purchase drivers, such as urgency, convenience, or emotional appeal, motivate the customer to make a purchase. Price drivers are the factors that influence the customer's willingness to pay, such as perceived quality, perceived value, and affordability. By understanding these drivers, you can tailor your marketing messages, pricing strategies, and sales pitches to resonate with your target customers.
Ensure your offerings meet those drivers.
By catering to the specific drivers of your target segments, you increase the perceived value of your offerings and make it more likely that customers will be willing to pay a higher price.
Structure prices to capture your offerings’ value.
Structuring prices to capture the value of your offerings is crucial for maximizing sales volume. It involves setting prices based on willingness to pay research and the perceived value of your product or service rather than just the cost of production or competitors' price.
In conclusion, the traditional demand curve many businesses use to determine pricing can often lead to missed opportunities and decreased profitability. Recent studies suggest that there are important factors that influence buyers' willingness to pay and generate higher sales beyond the traditional demand curve, such as product differentiation, innovative payment options, irrational buyers, and imperfect knowledge.
Companies can adopt a successful pricing strategy that leads to higher sales by identifying differentiators, finding segments willing to pay more for those differentiators, learning value drivers, purchase drivers, and price drivers, ensuring that offerings meet those drivers, and structuring prices to capture the value of offerings. Companies that align price structures and levels with buyer value perceptions can improve price performance and boost sales.
Download our Guide to the 7 Easy Steps To Successfully Increase Prices.
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