Pricing is one of the most exigent marketing decisions to be made. If the price is too high, it can scare customers away. If it’s too low, you can leave substantial amounts of money on the table. It can also raise doubts about the quality of your offering. It’s even more arduous when you are launching an innovative product. Since the benchmarks for determining value are not clearly evident.
We all tend to think of innovation in terms of services and creative products. But applying it to a far wider range of business activities is the need of this hour. Methods can be innovated. So can processes, the go-to-market, supply chain, marketing, your business model etc. One neglected domain for innovation is pricing. Most companies set a price list for their products and services without a lot of thought. Then offer deals, discounts, and negotiations on top of that. They may be missing a trick here. But we do not want you to! Here are some alternative and innovative pricing strategies by other brands that have set their cash registers ringing for you to take inspiration from:
The best product innovation sometimes is the monetization model itself. Numerous companies have become victorious by pricing transactions based on a pay-as-you-go system. Michelin is the best example. Michelin invented a new tyre that would last 20% longer than any other tire on the market in the early 2000s. Out of euphoria when the CEO asked his sales team, “How much more can we charge for this product?” their response sank his heart. The answer was somewhere around 5–6% more. Surely not an innovator’s answer. That’s when they decided to look at reimagining the way they price their product. Instead of pricing it on the basis of the cost per tire — they decided to price it on the value of the tire — which is the number of kilometres it ran before it wore off. This switch from a price-per-tire to price-per-kilometre model ensured that they captured 100% of the added value. And advancements in GPS technology helped make it possible. This helped them to record one of their biggest profits the industry has seen.
Fix your jaw that just dropped! I have more for you. The industrial giant GE launched a large initiative in 2011 mainly to attach and embed digital sensors to its medical equipment, aircraft engines, power turbines, and different equipment. And their pricing was “outcomes-based services” where customers only pay for efficiencies provided by GE based on KPIs set by the customer. This approach has paid off well. The company now generates $1 billion per year from the outcomes-based services it provides.
Takeaway:this model is apt for those who have total control over how customers use their products. Customers appreciate this model as they don’t have to make a huge upfront investment. They only pay for what they use and the benefits delivered, thereby minimizing risk.
Two: Subscription model
This is not an alien idea. Nothing new. But with the advent of digitalization, we’ve seen an immense rise in subscription setups in industries. It often works so nicely because customers today prefer sharing over owning. It leverages the increased desire among consumers to access goods and services immediately with the costs spread over multiple months or even years!
While subscription pricing is commonplace in most digital platforms nowadays — Dollar Shave Club revolutionized the men’s grooming industry with a very simple pricing trick. When they launched in 2011 for a $1 a month you get 5 cartridges of twin blades including a free stick, or you can upsell yourself to a $6 for 4 cartridges of 4 blade razors. As simple as that. No more 1000 options to choose from. No more weekly visits to the convenience stores just to buy blades. It is a mystery how no one thought of this pricing model for blades till Dollar Shave Club came around. Even though blades as a product category is something where the purchase cycle was once a month — it somehow never struck traditional brands like Gillette to price it as a something where users would pay a fixed cost every month on auto-pilot. Too bad Gillette, Dollar Shave Club is having your customer for breakfast, lunch & dinner. All this due to a simple pricing innovation — that tied in beautifully with the purchase patterns of the product category.
Takeaway: In case your product is a must use every month — think of how you can get subscription pricing into the mix
Three: Penetration Pricing
Customers can’t buy products they don’t know about. And in a market heavily driven by consumer trust and brand loyalty, many consumers are reluctant to switch brands or try new products. After all, the reasoning goes, why spend money on a product that might be awful? That’s where penetration pricing comes in. Television and internet providers are notorious for their use of penetration pricing — much to the chagrin of consumers who see massive sudden increases in their bills.
Comcast/Xfinity, for example, regularly offers low introductory prices such as free or steeply discounted premium channels. At the end of a specified period, the price increases. Most consumers continue paying the higher bill, but some jump to a new provider offering an introductory rate. Many new foods introduce themselves to the market with a penetration pricing strategy. Some businesses even give packages of new products away by, for example, sponsoring events and providing sample packs to attendees. In one notable such example, Frito-Lay introduced Stax to the market in 2003. The brand was a direct competitor to the well-established Pringles line of chips and hence to switch consumers away from Pringles had to price it at a much lower price point. During the first few months of the product launch, cans of Stax were available for $0.69 in grocery stores. After the initial penetration strategy to draw customers, the common supermarket price rose above $1.
Takeaway:The hope of using a penetration pricing strategy is that you’ll create brand switches in a highly crowded market and over time you get customers to love your product, increasing their willingness to spend more down the road.
Four: Demand-Driven and Dynamic Pricing
The price of fish in the fish market goes up and down in line with demand. So does the price of an aeroplane ticket or a hotel room. Bierborse is a bar in the Berlin Market where the price of beer rises or falls depending on demand. The canny beer drinker can win by choosing one of the less popular ales at a quiet time of day. The primary examples of dynamic pricing can be seen in the travel industry where prices can greatly vary from one day to the next.
And with the growing dominance of OTAs (online travel agents), who have significantly transformed the competitive landscape, travel companies can finely tune their pricing based on the slightest market sensitivities. Examples of demand-driven pricing also include the pricing of Uber for rides based on supply and demand, and the gas station chain 4-U that bases its prices on current oil prices and weather conditions.
Takeaway: dynamic pricing works if demand and price elasticity in your industry vary significantly, or if supply is constrained or fixed.
Five: Hook them & Hold’ them
Gillette famously used its ‘Razor and Blades’ marketing ploy a long time ago — it sold its razors at a small loss to make money from selling the blades. The inkjet printer on your desk was inexpensive but over the years you spend a small fortune on ink cartridges.
The Nespresso coffee company makes most of its money not from the machines but ongoing sales of coffee cartridges. The ways to innovate with pricing and monetization are legion. Fresh approaches can differentiate you and attract new customers.
Takeaway: If there are complementary products in your brand — look at one of the lower-priced products as a hook product that can draw users in