Few elements of marketing are more peril-fraught than pricing. If you charge too much, you don't sell as much, which blunts your growth. If you charge too little, you're leaving money on the table, making your product and company less profitable.
When I'm asked to advise on pricing, I tend to arrange a product category and the products within that category onto a set of five sliding scales:
- Unique-Commodity. A fully unique product is one-of-a-kind. A fully commoditized product is available in volume from multiple firms.
- Essential-Redundant. A product that's fully essential means the customer can't live without it. A fully redundant product is simply unnecessary, even as a backup.
- Scarce-Commonplace. A scarce product is difficult to get while a commonplace product is easily available anywhere.
- Addictive-Replaceable. An addictive product "locks" the customer into future usage. A replaceable product can be swapped out for some other product.
- Visible-Obscure. A product that's highly visible "needs no introduction" because everyone already knows about. Nobody knows about an obscure product.
The rules for using the scale are:
- The further you can push your product sliders to the left on the scales, the more money you can charge for that product. This is sometimes called "premium pricing."
- The sliders cancel each other out. For example, if you have two on the far left, two on the far right, and one in the middle, the product commands a "mid-range" price.
Examples of usage.
Extreme example No. 1: Suppose the world was going to end, and there were a very limited number of families who could be saved by colonizing another planet. All five scales would be all the way to the left, so tickets would cost billions of dollars.
Extreme example No. 2: Office supplies. They're made by multiple companies in high volume, are available everywhere, and the problems they address usually have multiple solutions. Thus all five scales are all the way to the right, which is why they're so cheap.
Real-life example: you're marketing a cybersecurity software product (let's call it SuperSafe), and the average industry price for such software is $10,000. Here's how that product might be rated:
- Unique-Commodity. This is a fairly specialized product.
- Essential-Redundant. This is an essential element of any corporate data processing.
- Scarce-Commonplace. There are multiple solutions, so this is middling.
- Addictive-Replaceable. These products are often customized to specific corporate needs, making them difficult to replace.
- Visible-Obscure. At this point, cybersecurity is highly visible but there is no company that immediately comes to mind when the subject is broached.
How to use the insight.
A novice marketer might drop the price in order to create more demand, hoping to increase volume to make up the loss in profit that discounting always entails. Good luck with that, because your competitors can probably match your new price and customers will wonder why your product is cheaper and possibly assume it's not very good.
A journeyman marketer might push the engineers to create features that would make the product more unique, thereby justifying a higher price, say $11,000. Alternatively, new features might make a customer pick SuperSafe, all other things being equal. The problem here is that past a certain point, new features bog down a product, especially if it's not immediately 100 percent clear to customers why they'd want or need that feature.
A truly brilliant marketer, however, use the insights from the scale to put the bulk of the marketing investment into moving the visible-obscure scale to the left, because that's where there's the most room for improvement. Tactically, such investments would probably include things like publicizing successes, referral-focused sales training, getting press coverage for SuperSafe executives, and so forth.