When creating a pricing strategy, a seasoned marketer will tell you that you can come up with whatever strategy you want, but the market decides the price, and you are wasting their time. I will admit that there is some truth to their statement, that the market will determine the fair market value, but it is our job as marketers to influence the customer’s behavior to optimize our product’s pricing in the market.
A good understanding of your customers is the foundation of a good pricing strategy, which does not have a predefined destiny as some marketers believe. There are good books on the market such as The Strategy and Tactics of Pricing by Thomas Nagle, that will help your understanding the different pricing models, such as Value-Based Pricing, and the development of a pricing strategy. As a clinician of Pricing Strategies, I am a supporter of Value-Based Pricing and is what I preach to fellow marketers. However, there are additional complexities that supplement Nagle’s introduction to pricing. When executing Value-Based Pricing, one starts with the Next Best Alternative (NBA) as the base to where one should begin the upward or downward pricing laddering. The most straightforward answer to this question is my competitors’ product, but the complete answer is reached when you explore the question of what is the job to be done? Sarah Green Carmichael has a podcast on Harvard Business Review (HBR) which she explores this very topic called The “Jobs to be Done” Theory of Innovation and could be a good introduction if you are not ready to buy Clayton Christensen's, a professor at Harvard Business School, book on Competing Against Luck: The Story of Innovation and Customer Choice. Understanding the NBA is the means of exploring and starting to understand the human condition.
Part of understanding the human condition is the empathy needed to apply to the customers you are trying to influence. Let’s do a thought experiment where I am a car dealer, and you are in the market for a new car. The manufacturer's suggested retail price (MSRP) is $35,000, and we are sitting at the negotiation table. We exchange a few pleasantries, and the battle begins. Now pay attention to your feelings and reactions! I tell you “I have a car on the lot, it has everything you are looking for. I can do $5,000 for it today.” Did your eyes squint? Tilt your head? Did you think that there might be something wrong with the car or some catch you are missing? What did you feel? Now let’s do the same experiment, and I say to you “listen, I know what the MSRP is, but it is merely a suggestion. I have six buyers that called me about this car, and there is a lot of demand for it. It is one of two left in the nation, and they are not producing any more of them. If you don’t purchase this car, I know any of the other six will for $50,000.” If you felt a little bit of irritation, that is expected. However, the ability to put yourself in someone else’s shoes is the empathy that is needed to help you price premiums or discounts correctly.
The thought experiment shows that we can influence price and that if one takes a trip down the lazy river of pricing strategy, you can cause people to question the quality of your product or even offend them. I am sure you won’t buy another car from that sales associate who is jacking up the price or walks away when you suspect that they are trying to sell you an inferior product. You don’t want to have your customers go through these emotions. You want to make the customer feel like they got what they paid for or that they got more than what they paid for, also known as consumer surplus. That is why it is crucial that we explore the right questions and utilize Value Based Pricing in a combination of Pricing and Marketing psychology to optimize your pricing strategy. Influence your customers to pay what you think the product is worth is very powerful and a good pricing strategy follows a good marketing strategy, and a good marketing strategy starts with understanding your customers.