PRICE INTELLIGENTLY

Developing Your
Pricing Strategy

CHRISTOPHER ODONNELL

iBooks Author

C HAPTER 1

The Challenge and

Importance of Pricing

I N THIS CHAPTER
1. The most important business decision you will
make
2. Revenue optimization
3. Unit sales maximization
4. Value perception
5. Exercises

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The most important business decision

you will make
Every business profits and losses can be described in a spreadsheet, and though the model of each is unique they all share
one thing in common: at some point the number of customers
is multiplied by the sale price of the good or service.
Optimizing the value of each potential buyer is the most critical activity to making a business model work. Understanding
price sensitivity, value systems, and the buying behavior of
your target customer is perhaps the single most treasured
piece of institutional knowledge an organization can develop,
though shockingly few get that far.
As a business owner, operator, or manager you generate value
day in and day out by making good decisions. Some of these
decisions are creative decisions, some are interpersonal, and
many are quantitative. Though there are thousands of these
decisions that need to be made in order to operate a business
profitably, none is more important and fascinating as the decision of how much to charge for your product or service.
Pricing is an art as well as a science: a decision making process that requires both qualitative and quantitative inputs.
While it is valuable to acquire a deep knowledge of the target
customer, and thus an instinct for their value system, pain
points, and requirements, this knowledge does not suffice. At
a minimum, it is necessary to acquire a working awareness of
the methods and vocabulary of pricing specialists, which will

allow you to make far more informed decisions. Developing

this awareness is the goal of this publication, and we are confident that you will quickly and efficiently get up to speed,
speaking the language of price strategy.

Revenue optimization
Clearly the first benefit of optimal price point identification is
to ensure that no money is being left on the table. That is, that
your product or service is not identifiably more valuable than
the price you are charging for it. Perhaps you have had people
make a purchase decision with few objections, seeming to
glance over price as small administrative detail. These scenarios are common and represent opportunities to affect meaningful business change by understanding more about the customers price sensitivity and ultimately finding a higher, more
appropriate price and package. Goods and services should represent a good value, not a no-brainer purchase decision; if
your market never comments on or discusses your pricing and
packaging, it is a sign that more thorough research is warranted.

Unit sales maximization

On the other side of the coin is the effect of price sensitivity on
product or service adoption. In certain circumstances, such as
the early stages of a startup business, there is meaningful
value to the business to have potential customers adopt the
use of the offering. A thoughtful pricing strategy should take
this into consideration and recognize that momentum of adoption can offset marginal lost revenue through generating
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greater awareness that leads to future sales. The optimal price

point to maximize revenue is often different from that which
aims to optimize the rate of adoption. It is a key factor in pricing strategy to understand if there is a wide delta between
these two numbers, and to act in a manner that is consistent
with the business current strategic priorities.

Value Perception
One realization that most often shocks pricing newcomers is
that, below a certain point, a price can deter potential customers who perceive low price as an indicator of low quality. Consider a $15 mountain bike, or an urban condominium listed at
half the price per square foot as the market rate, or maybe a
$30 pair of running shoes. While there may be generated interest in products priced so aggressively, the suspiciously low
price will draw buyers attention to shortcomings while encouraging a skeptical mindset.
The strategy of deliberately pricing products much higher
than, say, a competing offering has worked marvelously in certain circumstances. In new markets, or with novel new product offerings it should be considered and understood what the
impact of intentional overpricing could be vis a vis the market perception of the new widget. The best cases have the surprisingly high prices triggering a renewed interest and deep
curiosity for the value proposition of the product, often resulting in speculative purchases.

Exercises
For this section, consider these questions on the left, writing
2-3 sentences in response to each.

Q UESTIONS
1. When did you last choose a price for a product
or service? What quantitative and qualitative
information did you use to make that decision?
2. What impact would a 10% price increase have
on your overall profitability as a business,
assuming you did not lose sales?
3. What impact would a 10% unit sales increase
have on your overall profitability, assuming
your price were 10% less?
4. Can you identify any suspiciously low priced
products or services in your field?

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C HAPTER 2

The Value
Metric

I N THIS CHAPTER
1. What is a value metric?
2. The importance of being understood
3. Exercises

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What is a value metric?

The reality of pricing is that ultimately you have to charge for
something, and that something is traditionally described and
counted in the form of a value metric. If you are selling eggs,
the value metric is the egg. Seems simple, right? Well, it ought
to be simple but often the best intentions lead to the presentation of a convoluted pricing scheme with an unclear or confusing value metric.
Consider, if you will, selling online email services. At first
shade it seems simple: you offer the ability for a company to
send email to individuals, and should therefore charge for
each email sent. Or is it for each person who receives an
email? Or is it for the size of a list, or rather for the number of
sends per month? All of these options incur incremental cost
for you, the service provider. You could, for example, implement a pure, transparent cost plus pricing tactic that
marked up the cost of goods sold, so to speak, and charge customers a premium for a simple-to-use service with tremendous underlying complexity. But how, in this scenario, are you
to present clear pricing on your website and marketing materials? Clearly, this is not a good approach. In fact, the most valuable exercise here is to identify who your target buyer is, and
work to determine the correct value metric for that buyer.

you can serve them properly and charge them an accessible,

transparent and predictable price.
If your buyer is, instead, a large company with a dedicated
email marketing team whose job it is to send various targeted
email blasts to segments of contacts within their overall list,
your value metric might well be the total number of unique
emails sent.

The importance of being understood

The single most important test of a value metric is simple:
does your customer know how many [your metric] he needs?
In the above example, the small business owner certainly
knows the size of his email list but perhaps doesnt know how
to easily predict the number of emails sent [within a certain
time frame]. The email marketing team, on the other hand,
knows not only how many emails they send (in addition to
their list size), but also how many they might need to send during special promotion periods or other circumstances. In each
case, the value metric is clear and understandable by the target buyer.
When someone asks you to clarify your value metric, you
know you have a problem.

Maybe your buyer is a small business that sends varying

amounts of email month-to-month. For these folks, the right
value metric is probably the total size of their list. By bucketing these customers into different discrete purchase options
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Exercises
For this section, consider these questions on the left, writing
2-3 sentences in response to each.

Q UESTIONS
1. List three different value metric options you
have for your product or service, even if you
have identified one you like.
2. For each of these value metrics, is there a type
of customer who knows how many he needs? Is
there a type who would be confused or be
forced to perform an unnatural calculation?
3. Name a creative value metric! Think of
businesses that have been radically disrupted
in the last few years; in which cases have new
companies used creative new value metrics to
introduce a disruptive product?

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C HAPTER 3

Packaging &
Bundling
I N THIS CHAPTER
1. Packaging basics
2. Making bundling work
3. Tiered pricing
4. The power of customized pricing
5. Exercises

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Packaging basics
An aspect of pricing that is as old as time is the principle of
combining goods or services in various combinations and then
offering a price for such a group. In industry parlance this is
known as packaging or bundling. Dont be fooled by the name,
this topic extends well past the method in which a physical
good is wrapped and presented. Packaging encompasses a farranging set of tactics and considerations designed to entice
the buyer while rewarding the seller. A working vocabulary of
the common approaches used in bundling remains a fundamental building block of a professionals pricing knowhow.
Generally speaking, bundling of discrete purchase options
into a single package benefits the seller. In the rational buyers
perfect world, each component piece of a purchase transaction would be separate and priced in consistent relative value
to the others. In such a world, the buyer would have access to
his most efficient deal, as he would choose only the options
that suited him. Imagine buying a car from a dealer who let
you customize every last option, choosing only what you really
need. Now remember every time youve bought a car: everything works on the idea of packages. Though there are quite a
few sunroofs out on the road that get little to no use, they were
all paid for - at high margin.

Making bundling work

We know that bundling is invariably in the sellers favor, and
so we must wonder: how can bundling goods generate perceived value for the buyer? The answer is straightforward:

bundling presents an opportunity for the seller to propose a

discount.
Leveraging an intelligent bundling strategy, the seller can enlarge average deal size by dangling unnecessary but heavily
discounted items in front of the buyer.
The buyer will often be irrationally enticed by such offers,
sensing that the incremental power of each purchase dollar is
uniquely enlarged in the context of the bundled offer being
presented.

Tiered pricing
Bundling often presents itself in the form of tiered pricing. Particularly in the modern world of software, there is an increasing and justified investment in understanding the segmentation of the target market, and offering bundles at different
price points to each segment of this market.
In practice, this segmentation is often a ruse. A product that is
available for a monthly subscription may offer 4 different
plans for the express purpose of framing the intended plan in
a favorable, understandable light. The distractor plans will
typically serve to establish value of each component part by illustrating the price of at least one plan that is insufficient, and
at least one that is bloated and too expensive. This tactic can
work brilliantly, demonstrating the thoughtfulness of the bundle (all the things you seem to need, none you dont) while
as we know serving to offer a bundled discount that is quite
favorable to the seller.
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The power of customized pricing

Exercises

One of the main advantages to tiered pricing is that it helps

the buyer understand why the pricing and packaging being
presented is appropriate for them. One can take this principle
a step further through the use of editions, deliberately bundled offerings that represent turnkey purchase options for various target buyer personas. Once again, we see the simultaneous power of presenting the buyer with marginal buyer power
while optimizing for deal size and margin for the seller. What
is critical when offering pre-set customized bundles for your
different type of buyers is to deeply understand their value systems, and to see the relative value and importance of each feature or item you can offer. Conjoint analysis and discrete
choice modeling are strong options should you choose to invest in quantitative research in this regard.

For this section, consider these questions on the left, writing

2-3 sentences in response to each.

Q UESTIONS
1. What bundling does your business employ
today? Where is marginal gain realized
through this bundling?
2. What customized pre-set bundles could your
business consider offering? Is there a type of
buyer that remains underserved by your
current bundling options?
3. Does your business have a sunroof,
something that buyers happily purchase
[because it is bundled with other products]
regardless of actual need?

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C HAPTER 4

Discounting

I N THIS CHAPTER
1. Offers
2. Promotional discounting
3. Long-term value perception
4. Exercises

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Offers
To maximize sale volume and deal flow, introducing urgency
into the buying decision has as large an effect as anything.
Amongst qualified leads the primary objection to moving forward with a deal is almost always now is not the right time.
Sometimes this is true, more often it is an alibi; its your job to
make it the right time for the lead, and providing a due date is
a fine idea.
When exploring the use of discount offers, keep in mind the
two factors that together combine to generate value for the
seller:
1.

Introduction of urgency

2.

Promise of value

ling, given the ease with which the buyer values the savings;
knowing the value of the offer in concrete dollars is hard to
beat.

Promotional Discounting
A good reason to offer discounted pricing is to generate new
accounts and potential repeat purchasers. Consider the
bounty of discounts that come to the new homebuyer; these
discounts are prescient in their aim to capture the loyalty of a
neighborhood newcomer and can afford to be aggressive.
Of course, remember to quantify the value of such discounts
over the long term. If you take a short-term loss, be sure you
know how to measure the long-term gain, to ensure that promotional discounting is working for your business.

One of these factors, even done right, will cripple the effectiveness of the offer if done without the other. Showing a huge discount with no end date, or having a one-day sale without a
meaningful discount both fall well short of their goal.
Instead, clearly show the end date and/or terms of any offer.
Explore traditional tactics like the one-day sale or the messaging of while supplies last. At the very least, be sure to display offer ends on <date> prominently in the offer creative.
To demonstrate the greatest value, many have found that at
lower price points a percentage savings generates the most
buyer interest, and as prices rise the total-dollars-saved metric makes a bigger statement. The latter is particularly compel-

Creative promotional discounting approaches have been on

the rise, aiming to generate pass-along value or viral growth
characteristics. The goal in these cases is to create an offer
that rewards the buyer directly but only if and when the buyer
brings another potential customer into the fray. A new service
may give account holders a web link (bearing a coupon code)
for the account holder to pass around to friends. Those friends
who act on the link and create accounts of their own receive,
say, $10 in credit, while the original sharer receives the same.
Such promotional approaches can be tremendously successful, particularly when a business has made customer satisfaction a priority above all else; in addition to being incented to
share the service, the account holder will testify to the product
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or services value personally, dramatically increasing the value

of the offer in the prospects eyes.

Long-term value perception

Any time a company decides to charge less for what it offers it
runs the risk of devaluing these core assets. In order to safeguard against the deterioration of perceived value, keep some
of the following heuristics in mind.


Dont offer discounts for long periods. Remember
to retire your offers after they have served their usefulness.
Maintain credibility with your buying audience by retiring offers in line with the published schedule. Failure to do this will
result on your customers archiving offers for future consideration. When this happens you have failed to introduce urgency!


Vary your offers. Offers that are too consistent will create a rhythm that will once again undermine your efforts to introduce urgency. Whenever you give your buyers a reason to
wait, they will.

Exercises
For this section, consider these questions on the left, writing
2-3 sentences in response to each.

Q UESTIONS
1. What is one example of your business offering
promotional discounts? What is the cost of
these discounts, and what is the long-term
gain?
2. Name three ways your business could create
urgency in the buying cycle, by using discountbased offers.
3. Name one business that has tarnished its
brand or product value in the public eye by
offering consistent, aggressive discounts.

Guard your value. Above all else, remember that discounting communicating that you are willing to sell for less
be mindful of the dynamics that you introduce, or quickly
your buyers will come to value your offering less highly.

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C HAPTER 5

Conclusion

We hope that this introductory guide to

pricing was useful to you and your company and represents a valuable first step
toward developing a robust, validated
pricing strategy. If you found this eBook
helpful, or if you had hoped for more information in a certain area, please visit
http://www.priceintelligently.com and
we will do our best to meet your needs in

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 2012 - 200OK, LLC.

All rights reserved. http://www.priceintelligently.com

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