While it might seem counterintuitive, increasing prices, when done strategically, can lead to increased revenue without significant loss of customers. A word of caution – it’s vital to ensure the quality of your product or service justifies the price increase.
The simple analogy I often share is that of an iPhone. A new iPhone costs about $1,600-$1,800 on launch date and yet, I know at least a few people who would queue and buy the new iPhone on launch date despite the cost being more than 50% of their monthly salary.
Price Skimming
This strategy involves setting a high price for a new product to "skim" maximum revenue layer by layer from those willing to pay a premium. Over time, the price is reduced to capture more price-sensitive segments of the market. Samsung’s smartphone Galaxy S20 was priced at $999 on the release day. However, after the release of its next flagship smartphone, Galaxy S21, the price of the Galaxy S20 significantly dropped, and it could be found for the price of around $600 depending on the store you are buying it from.
Product Business: For a seasonal business such as gifting, delivery charges may want to fluctuate with demand, just like how Grab adjusts its fees when there is a surge in demand.
Service Business: Accountants who perform annual tax filing often have a lot of last -minute requests when the financial year is ending. You may be able to skim off extra fees for customers who engages you with a very tight lead time because this means your team will have to work overtime and there will be extra costs associated with that.
Tiered Pricing
Offering products or services at multiple price points with varying features can cater to different segments of your market. This maximises revenue by targeting price-sensitive customers and those willing to pay more for premium features. Streaming platforms, like Netflix, offer a basic version with 1 user and a family version with additional users.
Product Business: This is common pricing strategy in the software/app business and it may be applied even for traditional product businesses. If you are a bakery selling customized cakes, you may want to consider introducing a cheaper cake with DIY customization.
Service Business: For one of my business that provides creative meeting space, we sometimes offer cheaper meeting packages for off-peak periods to attract price-sensitive customers. Especially if you are very confident of your service, offering such packages can attract long-term customers who may not even consider your company in the first place due to price.
Psychological Pricing
Pricing products in a way that appeals to a customer's emotional response rather than their rational side. The classic example is setting prices just below a round number, like $9.99 instead of $10. Retail stores frequently use $0.99 or $0.95 price endings to create a perception of a deal or discount, even if the price difference is just a few cents.
Product Business: This pricing method is especially useful for high-value products. For a company selling cookies for $4, bringing the price down to $3.97 will have a marginal effect as compared to a company pricing it’s smart phone at $1,697 instead of $1,700.
Service Business: Marketing agencies may like to consider pricing their services at $3,997 instead of $4,000 even though it’s only a $3 difference.
Value-Based Pricing
Instead of deriving prices based on costs, value-based pricing focuses on the perceived value of a product or service to the customer. This strategy aims to capture a larger portion of the value created for customers. The way of determining the value is to find like-for-like products/service in the market and find out what customers are paying for it. This requires you to be honest about whether you are like-for-like and if not, how much are the shortfalls or premiums are worth to customers. Offering a hotel room is a 3-star budget hotel is not like-for-like with a 4-star hotel room with an international buffet breakfast.
Example: Imagine a software tool that automates a tedious 20-hour monthly task for a company. If the company values this task at $50/hr, then the software's perceived value is $1,000/month. By pricing it at $500/month, the company sees immediate value even though the software's actual development cost might be significantly lower.