Let Your Customer Set the Pricing Strategy Himself!

Let Your Customer Set the Pricing Strategy Himself!

discover | Wednesday - 29 / 05 / 2024 - 11:07 pm

Some of you might be surprised by the term “pricing strategy”. Unfortunately, many companies follow the “set the price once and forget it forever” approach, and these companies fail to develop a comprehensive and research-based strategy to determine the appropriate price points (this could be the reason why 18% of startups fail!).

For some, pricing may be an arbitrary decision loosely based on market standards and competitor price points (and we don’t deny their importance, of course). Some also offer large discounts in an attempt to increase profits… this raises the following question: what’s the problem with discounts?

The answer: Discounts help increase your sales in the short term, but in the long run, the negatives of traditional discounting outweigh the positives, which in turn affects your credibility, revenue, and company growth plan.

So, a strategy is needed in this regard… and here comes the most important question:

Why is a pricing strategy important?

Let’s first define the concept: A pricing strategy is the methodology or underlying assumption that stands behind the pricing of your product. This strategy allows you to make informed decisions about pricing changes, and it also allows you to understand how these changes will affect and appeal to your target audience. Without an effective pricing strategy, you’re like shooting darts in the dark; there’s a chance you’ll hit the bullseye, but you’re more likely to miss the board entirely!

When you don’t set a product’s price using a sound strategy, the following happens:

– You fail to meet market expectations.

– You fail to achieve maximum revenue.

– You risk losing business to competitors whose pricing more accurately reflects market trends.

– You fail to communicate the true value of your product (in other words, you fail to make your customers feel the importance, or value will appear in your product when customers use it).

Let’s consider the following scenario:

You are launching a new product and it’s time to determine pricing and introduce the product to the market. Since you don’t have a specific pricing strategy in place, you’ll often resort to guessing what the price should be and then see how things go. Here, one of two things will happen:

1. Your price is too high. Most of the market will not buy from you, with the exception that if you are really good at selling the value, you may acquire a few high-end customers. However, there is a chance that these high-end customers will back off once they realize that the value you sold does not reflect the actual product, and they will switch to a competitor who offers the same value at a lower price.
2. Your price is too low. The majority of the market sees your product as cheap, low quality, and not worth buying at all, as the price point you set does not reflect the true value of the product. You may get some customers, but you won’t generate much revenue from them. If you’re not careful, you may even fail to price high enough to cover production costs. Then, when you realize you’ve gone too low, you’ll raise your prices and lose most of the buyers who bought your product (only because price was the most important factor for them).

The latter scenario is the most likely, as most startups underprice their products and gradually increase their total deal size as they grow. However, it’s not as simple as just keeping raising the price point of your product. You will inevitably hit a glass ceiling and see diminishing returns. Once you exceed a certain pricing threshold, you will narrow the market you can address, close fewer deals, and actually risk lowering your overall revenue.

How to Make a Truly Effective Pricing Strategy?

All the most successful pricing strategies share one thing in common: a complete focus on the customer and addressing customers pain points (problems). This is achieved through the use of a customer-driven pricing approach.

Customer-driven pricing is a deliberate strategy for setting prices for goods and services while considering current market conditions, ensuring that your product/service delivers what customers actually want at a price they are willing to pay.

No doubt you are eager to learn about the key aspects that make up a strong pricing strategy. These aspects are:

1. Know your customer inside out:

To build an effective value proposition, you need to map out the interests, problems, and motivations of those you are trying to attract. But don’t forget that everyone’s needs are not the same, so this should be reflected in your pricing strategy.

Customer segmentation is your friend in your efforts to achieve the most efficient pricing strategy. A key part of the customer classification process is understanding customers problem and showing how your product/service can solve it. This will lead to driving the perceived value of your product with your customers (without this, they will not be able to understand the value you offer them).

Historical purchase reports and consumer behavior within Logix financial management system can help you identify unique audience groups that you can target with more customized pricing to achieve profitability.

2. Value Proposition Clarification:

Understanding your customer is inseparable from understanding your value proposition; what makes your product/service superior?

Knowing your product’s unique selling propositions (USPs) (in addition to being good practice) will help you justify the prices you set.

This aspect of pricing strategy requires a deep understanding of the costs involved in each stage of production, including variable margins and long-term profit growth.

Armed with this knowledge, you will be in a position to identify the best pricing strategies and work alongside your marketing and sales team to implement them.

The goal of customer-driven pricing is not customer satisfaction with the price, but rather providing the best long-term value. That might sound strange or difficult to apply! This is why you need to follow the following step carefully…

3. Commitment to Continuous Improvement:

Remember what we said at the beginning of the blog post about the mistake of setting prices without change? The same applies to marketing strategy; it is closely linked to research and development efforts.

By collaborating with your product strategy team, you can identify areas where your customers want to see improvement. By being proactive in building the value of your products/services, your company will stay competitive in the fast-paced business environment.

4. Focus on Profitability, Not Sales Volume:

Going back to the dilemma of discounts, a pricing strategy that relies on discounts deprives you of the opportunity to achieve excellent sales, and therefore increase profits.

To compensate for this, you can offer lower prices to your customers in exchange for their “surely honest” reviews and recommendations, which is a great way to build brand awareness.

5. Integrate Price Management Technology:

To achieve success, all great pricing strategies rely on the latest price management technologies. The Logix financial management system enables you to process customer data faster and easier, and allows you to harness the power of price analytics to increase the efficiency of your pricing strategy.

The benefits of integrating technology into your pricing strategy are endless. Actionable insights based on purchase data and predictive pricing automation models are just a few of the powerful pricing strategy tools designed to help make your business more profitable.

Pricing strategy is one of the most important tools for your business’s growth. It helps you determine a price point that meets market expectations, and if you choose the right strategy for your industry and business type, you can see significant growth in revenue.

Of course, pricing is just one small step in a very large journey to improve revenue. On the other side of that journey, there is a need to manage the flow of money in and out of the business, and this is where the Logix system for financial management solutions comes in.

Logix Financial Management System is a dedicated platform for managing income, expenses, and assets. The goal is not just to keep the day-to-day business of the establishment healthy, but also to help you simplify revenue operations and continuously improve profitability.