20 considerations that will shape your pricing strategy
As noted recently, price is much, much more than a number on a sticker.
Following are 20 headline items to consider, which may help to clarify your pricing choices.
Context.
Purchase decisions are always made in a context that has a profound influence on the choice. In a supermarket, choices are often automatic, amongst a pool of acceptable options. Making a choice that turns out to be a mistake has limited repercussions, price variations are relatively small in the scheme of things, and most people are busy, just wanting to stick the needed items on the trolly and get out.
It is very different if you are the purchasing manager in a large corporation that is seeking a new computer system or piece of expensive machinery. Not only are there consequences of making a poor choice, but there are also others who will have a say, pushing their own agendas, driven by need, their KPI’s, necessity, and many other factors.
Range of price options.
In almost every situation, there will be alternatives. These may range from very ‘cheap’ to extremely expensive. The price communicates a product value proposition and positioning to the buyer, it sets a range of expectations. It tells them what sort of seller they might face, whether they should lean forward, lean back, or run for the hills.
The price impacts heavily on the subsequent behaviour of both buyer and seller.
Is the price ‘right’?
Price must feel right before it can be justified. A buyer rarely starts with a spreadsheet.
They start with a feeling. “That feels expensive, cheap, or about right.”
Only after that first reaction do they look for reasons to compare and rationalise. They ask for detail, invite competitive quotes. They ask their spouse, their finance manager, their builder, their procurement team, or the bloke at the barbecue who once renovated a bathroom and now claims expertise in all construction trades.
This matters because many pricing failures do not come from the price itself. They come from the story around the price.
A price can sit in the right range and still fail because the buyer does not understand the value, cannot compare it sensibly, does not trust the seller, or fears regret more than they want the promised benefit.
Comparison happens.
Every price is compared with something, no price sits alone in a buyers mind. To the seller, these comparisons are often obscured, seemingly irrational.
Every buyer brings a reference point, and the better you understand the behaviour of your ideal customer group, the better you will understand these comparisons, and be able to deal with them.
Buyers compare your price with the last price they paid, to a competitor, a cheaper less featured alternative, or to a number they made up in their head while watching television and having a beer.
That reference price matters more than many sellers want to admit.
A $20,000 Gucci handbag and a $200 imitation may carry similar functional utility. Both hold keys, lipstick, and a phone. While physically these bags may appear the same, the difference lies in perception, identity, scarcity, confidence, and social signalling communicated by that distinctive brand.
A premium installer, consultant, architect, lawyer, software provider, or specialist manufacturer plays a different game. Their higher price does not only say “exclusive” it must say “lower risk.”
A relatively cheap imitation handbag might signal clever buying, but a cheap structural engineer signals future litigation.
Is the price fair?
Price carries an automatic fairness test. Customers do not only ask, “Can I afford this?” They also ask themselves, “Does this feel fair?”
That fairness judgement can make or break the transaction.
Raise prices because demand has spiked, and the economist may nod, but the customer is likely to call it gouging. Add mandatory extras late in the buying process, and the margin may look better for a week, but trust account takes a hit that will not show up clearly in the monthly P&L.
This is why drip pricing, surprise fees, fake scarcity, and post-quote changes can do so much damage.
People will tolerate high prices when they understand the reason, trust the seller, and see the value. They punish prices that feel sneaky.
That punishment may not look dramatic, they simply stop responding.
The loss/gain ratio.
Losses hurt us more than an equivalent gain pleases us. We have evolved to be strongly loss averse as a safety mechanism.
Kahneman and Tversky demonstrated in a series of experiments, repeated by every psychology undergraduate, that people do not treat gains and losses symmetrically.
For most people, the pain of potentially losing what we already have far outweighs the possible joy of winning.
That matters in pricing because the buyer does not simply ask what they gain, they consider what they might lose.
What happens if this fails, if I overpay, or my boss disapproves of the choice?
What if I approve this and my boss asks why we did not choose the cheaper supplier?
What if the installation goes wrong, or the cheaper one would have done the job?
Will this choice make me look foolish?
A seller who ignores loss aversion usually reaches for a discount, which often fixes the wrong problem.
The better move is to reduce perceived risk.
Proof and guarantees reduce risk, as does transparency, testimonials from credible people, and demonstrated technical competence. Articulating the trade-offs demonstrates you understand and have accounted for the differing value of alternatives, which reduces the risk a buyer will perceive.
In many markets, you do not win by lowering the price, you win by lowering the buyer’s fear.
Paying hurts.
Paying for something does hurt, this is simply loss aversion at work.
That pain changes behaviour depending on a wide range of factors. Timing, framing, payment method, bundling, deposits, progress payments, subscriptions, finance, brand equity, and is the payment an avoidable expense or an investment.
This is where ‘packaging of price’ plays a huge role. A single large number can shock a buyer into delay, so stage it somehow so the same total price feel manageable. Bundle it with added features or benefits to reduce line-item shock, while possibly inflating the price of the individual items being bundled. If you have ever sat through a webinar that seeks to sell you some sort of course at the end, this bundling of inflated prices that are then discounted is standard practice. This is a combination of behavioural drivers that can be very potent.
A transparent breakdown can increase confidence when the buyer needs justification.
None of this changes the economics by magic. It changes the experience of the economics, as buyers often decide emotionally and post-justify rationally.
When cheap can be expensive.
Many businesses assume lower price always reduces the reluctance to buy. This is not always the case. In some categories, a low price will increase anxiety.
A cheap bottle of water at a service station feels welcome when you are thirsty, a cheap neurosurgeon does not. A bargain accountant may feel efficient, but may lack the credibility and resources to keep the tax office at bay.
Price is an anchor that shapes expectations.
Premium pricing can work in complex, risky, or expert categories, because the buyer uses price as a shortcut for confidence.
Anchoring works because the first serious number changes the mental landscape.
Put a $2,500 bottle of Grange at the top of the wine list, and the $70 bottle starts to look reasonable. Put the same Grange at the bottom, and you have probably found a good cook with a poor grasp of behavioural pricing.
Rolls-Royce understands anchoring beautifully. A million-dollar car looks absurd beside a $25,000 runabout at a carshow. At an airshow, surrounded by aircraft costing tens or hundreds of millions, it starts to look like an accessory.
The difference is the anchor that changes expectations and perceptions of price.
That does not make anchoring a trick, it makes it a powerful negotiating and selling technique.
Show the buyer the right comparison, and value becomes easier to see.
Show the wrong comparison, and even a fair price looks ridiculous.
Scarcity works, unless it looks manufactured
Scarcity increases perceived value.
Limited numbers, production capacity, time, specialist availability, rare materials, or genuine exclusivity can all sharpen demand.
The downside is that fake scarcity smells very bad indeed, and is rightly consigned to the ‘snake-oil’ bin. An ad on TV that declares “only three left” is treated with deserved scepticism by consumers who can smell bullshit at 100 meters.
Real scarcity requires clear explanation, and only then can it be seen as genuine.
Effort increases perceived value
People value visible effort.
Open kitchens work because diners see skill, heat, movement, discipline, and the craft of the chefs becomes part of the value.
The same principle applies in services, manufacturing, construction, software, consulting, and any expert work where the buyer cannot easily judge quality before purchase.
Showing the work, thinking, standards, and process builds credibility.
This is not to confront or bore the buyer with operational detail, but to give them evidence that the price rests on competence rather than hope.
Three choices is optimal.
Choice gives the buyer agency, which they value, while too much choice hands the buyer choice complexity that consumes cognitive capacity for little benefit.
Three is a number our brains easily accommodate. It offers comparison without complexity and is why every SAAS price list you have ever seen has three options. The middle option often becomes the safe choice because it lets the buyer avoid looking cheap while also avoiding feeling reckless.
Three gives enough contrast for a decision without forcing the buyer into a situation where cognitive overload works against making any choice. Two choices feels too binary, four or five builds towards indecision. In a commercial environment, too much choice invites waiting for more information as a justification, or for no choice at all.
The Decoy Effect.
A decoy option can make the preferred option look better.
Software companies use this constantly, as do publishers, streaming services, gyms, consultants, and anyone else who has discovered that humans compare options more readily than they calculate absolute value.
The decoy is designed to make the sellers preferred option look like great value when compared to the other options offered.
Precision pricing.
A precise price can signal calculation. It also relies on our brains seeing the first number in a sequence. $9.99 appears significantly cheaper than $10.00 even though there is only one cent difference. It is the first ‘9′ that makes the difference.
A building quote for $18,742 can feel as though someone measured, costed, and thought carefully. A round $20,000 can feel like a guess.
However, in some circumstances, precision works against you.
Premium categories often benefit from clean, rounded numbers, offering simplicity to buyers to whom a few dollars is neither here nor there. A $20,000 price on that luxury branded handbag is more likely to sell than if the tag was $19,997.
Use precision when it builds confidence, round numbers to signal authority, simplicity, or premium positioning.
B2B pricing must survive functional demands.
In B2B, the person who likes your product may not hold the power to sign the purchase order.
They may need approval from finance, IT, legal, procurement, operations, the CEO, or a buying committee. All must say ‘Yes’ to get approval, any one of them can kill it off with a single ‘No’.
As a result, the pricing and supporting information must help the internal champion defend the decision, by enabling them to dismiss the naysayers with the arguments that address the specific functional and personal concerns that play a role. The accountants will look at the budget allocation, the engineers at the operational performance, and the marketing people at the delivery of future value to the buyer, and so on.
The presentation of the costs and benefits of the purchase needs to reflect these specific functional biases, and knowing where the veto power lies is crucial to getting a ‘Yes’.
Discounts usually hurt you more than sway a buyer.
Discounting to a close feels efficient and is the first stop of most salespeople whose performance is judged by volume.
The twin downsides are that discounting leaks margin at a compounding rate, and builds doubt in the mind of the buyer.
Once you discount, the buyer asks a reasonable question: “What else could I have got if I had pushed harder?”
You may think you showed flexibility, while they wonder how much more they could have screwed you down. Once you start discounting, the perception of the ‘real’ price is pushed down. Consider your last visit to the supermarket. There are very few brands left that maintain some level of price power, as the retailers have persuaded suppliers to divert brand building investment into discounting.
That does not mean discounting should never exist. Sometimes stock, timing, capacity, or strategic reasons justify it, but discounting should never substitute for poor qualification, weak value communication, bad targeting, lazy follow-up, or fear of silence in the sales conversation.
If you need to adjust, add value before you move with price.
Add something the buyer values highly and you can supply at modest cost.
You bank $ margin, not sales volume.
Cost does not set value
Customers do not care what something costs you to make, deliver, or your profitability.
They care what your product does for them.
You must understand your costs in detail to run your business. Costs shape capacity decisions, product mix, operational priorities, investment choices, and the minimum price below which you slowly commit commercial self-harm. However, your direct costs will never create customer value.
Price on the value delivered to the customer, not on the cost you incur in doing so. Never confuse cost allocation with pricing strategy.
Price is a signal to customers
Price does not only capture value, but it also attracts and repels customers.
Set the price too low and you may attract bargain hunters, anxious buyers, high-maintenance customers, low-margin work, and people who treat your team like a vending machine with shoes.
Set the price too high without proof and you create disbelief.
Set the price properly, and explain it properly, and you attract customers who value what you actually do well.
This is why pricing strategy is a key component of overall strategy, and should never be left to the end, the last number considered before approaching a customer. Your price, and the way it is packaged and presented will attract some, hopefully the result you want, and save you time and selling resources by quickly filtering out those who are not in your ideal target group.
The most powerful word in a sales conversation is often ‘No’. Apart from the financial benefits of focussing resources where they will generate the best return, people always want what they cannot have.
Trust Sits Under Everything
Trust does not make every sale possible, but it forms the foundation of those that do occur.
A vegan will not buy a steak because a butcher seems honest, but they will buy their lentils from someone who clearly understands the quality and provenance they are seeking.
However, when all other things are equal, price becomes the discriminator. Therefore, it is the task of every marketer to ensure that everything else is never equal, and nurturing trust is an essential component of that task.
Warnings!
There are two warnings that need to be considered as part of your pricing strategy.
- Understanding the nuances of behavioural pricing can easily slide into or be seen as manipulation. Anchors, decoys, scarcity, bundled pricing, delayed reveals, and urgency can all work. That does not mean you should use them to manipulate. The aim is not to trick people into buying something they should avoid, it is to remove unnecessary friction from buying something that genuinely adds value to the buyer in some way.
Customers will not thank you if they see a pricing strategy as manipulative. Just look at the reaction of the recent federal Court judgement against Coles if you doubt that conclusion.
- Testing pricing options that delivers optimum value to both parties to a transaction makes great sense. However, testing price options amongst those to whom your offer is targeted is too often a step missed. Usually this is because it is too hard, is left to a junior in the organisation, is left to the sales force that is usually focused on volume and perceives price as a barrier or relies on some senior persons opinion.
Test behaviour, as customers often cannot explain why a price feels wrong, and they usually will not speak up when they see it as a bargain.
So, test price framing, bundles, tier names, quote layouts, guarantees, payment timing and terms, value-adds, and everything else that might matter.
The real job of price is to make visible the invisible bundle of value represented by the product. Customers do not buy the number, they buy what it represents. Optimising your price strategy optimises both your financial returns and the value received by the buyer.
Price is the visible number attached to an invisible bundle.
