Explore Pricing Strategies

How difficult was that? It can be a challenge to quantify value, especially if the benefits of the product/service are largely emotional or symbolic. Sometimes you have to get creative about establishing a price for the value created by your solution. Let's consider some of the strategies you can use to set your value and rationalize it to others.

Cost Savings

Your rationale for your price point may be based on cost savings. You can save customers money by charging them less for the product or charging them as much or more for a product that saves them money in other ways. For example, a customer may pay more for a high-efficiency light bulb that lasts longer and saves them money on energy costs. This is different than using price point to differentiate from a competitor. If you do this, be careful to not rely too much on price point. A competitor could easily come in and price lower than you, leaving you without a rationale based on value.

Added Value

Your rationale may be based on the value you add. When considering added value, economic benefits are usually easier to quantify than emotional or subjective benefits. For example, you may purchase a software tool that makes employees happier and more efficient leading to increased productivity and reduced turnover. Did you justify your product by assigning added value to the benefits provided? How confident were you in putting a value on those benefits? This can be difficult to do but it's essential to ensuring your customers are comfortable with the price.

Analogy

Your rationale may be based on comparison. For example, you may get the same enjoyment out of going bowling with a friend that you do playing an online game with them. Anchoring the price of the online game to the price of going bowling is one way to frame the benefit as something comparable to a familiar activity. Emphasizing your point of difference relative to alternatives is good but often doesn't go far enough. Many customers may already have an imperfect solution to their problem. You'll need to show how, at the price you are charging, it is worth them switching to your solution.

 

Don't feel limited by these categories. You may have a unique justification for pricing your product the way you do. The important thing is for you to be able to put it into terms that can be understood by your customer.

Talking to customers

View the video for an example from Stanford faculty member Baba Shiv about how to use story to get insight into how much a customer might be willing to pay for your product.

Explore a price setting example

Imagine you have invented a new type of the light bulb based on a light-emitting diode (LED) to replace traditional incandescent light bulbs. The value proposition for your new product points out two principal benefits of the new LED bulb:

  1. It lasts longer than an incandescent bulb. Your lab tests suggest that the useful lifetime of an LED bulb is 10,000 hours (ten times that of a conventional incandescent bulb).

  2. It's more energy efficient. An LED bulb can produce the same amount of useful light as a 60 watt (W) incandescent bulb using only 10W of electricity.




 

How will you price your bulb?

A) Based on what it costs to produce

B) Based on the price of other lightbulbs

C) I'm not sure


 

Open up your workbook to Activity 6, or download the workbook, and work through the process of setting your price.