4 Pricing Strategies to Promote Value

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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You know the value of your product — the benefits and innovations that set your products or services apart from the rest. You want your customers to think about these factors when they weigh your product against competing selections, but odds are that they won't. Of the many options on the shelf, customers are likely focusing on the price tag. Don't think lowering your prices is the best route to take, though. Consistently undercutting your competitors will get you more customers at first, but if that is all you do, you can kiss your brand equity and profit margins goodbye.

Don't get sucked into a price war. Instead, change the way your customers view your products. Convince them that your product isn't just a commodity that can easily be substituted by the next, cheaper item on the shelf. Marco Bertini and Luc Wathieu describe four strategies to stop customers from fixating on price. Your main weapon? The price.

1. Specify Pricing by Value

Paradoxically, the best way to draw customer attention away from price is to revise your pricing strategy. One option involves changing the way you present the prices of your various offerings. Divert their focus from the price itself, and specify the value you're offering.

Goodyear did this with great success. The tire company had a hard time convincing their customers that their tires were worth the premium price. So they began to base the pricing on how many miles they're expected to last. Instead of using a lot of engineer speak and going into the complexities of their innovations, they figured out a simple way to communicate their premium value (thus the reason for their premium pricing). That's the kind of value customers are willing to pay for.

2. Raise Your Price

In a price-conscious market, consumers usually pick the product with the lowest price, if they think the products are of equal value. Throw in a price that's unusually high, and you'll grab a second look. Take advantage of the curiousity and convey benefits that they hadn't considered before.

For example, Burt's Bees priced their personal care products at 80% to 100% over competing, nonnatural brands. Customers were shocked by the unusually high prices, but they also wondered what made Burt's Bees' products so special. They discovered that Burt's Bees' offerings were made with natural ingredients by a socially responsible organization. And to many customers, this mattered.

3. Offer Menu Pricing

Allow customers to select parts or services for their individual needs. Breaking down the prices can help customers focus on value than the lump sum total. It also allows price conscious customers to opt for basic services while those who are willing to pay for value will upgrade.

Bertini and Wathieu conducted several experiments to test this strategy. In one experiment, the participants were asked to choose between a $165 nondirect, no-frills flight and a $215 direct flight with meal service and in-flight entertainment. They created two levels of amenities for the $215 flight on the assumption that better quality would convince more participants to choose the higher fare, but it turned out that quality didn't matter when the fares were presented as a lump sum. Rather, it was when the fares were itemized and the quality of the amenities made explicit that more participants opted for the higher fare.

While price partitioning is great way to highlight your competitive advantages, this strategy often backfires when companies itemize fees for standard, unavoidable, or mandatory features — like check-in and baggage handling.

4. Offer Personal Relevance

This strategy is effective when customers are presented with several options designed to appeal to different tastes. With price differences out of the picture, customers will need to discover which option suits their needs best. It compels them to base their purchasing decisions on the differentiating features of your products and not solely on the price.

One example of this strategy at work was Apple's decision to sell every track available on iTunes at the uniform rate of 99 cents per track. Steve Jobs was criticized for not taking advantage of the fact that high-demand products can carry a higher price and for disregarding the conventional practice that lower-demand products must be priced lower. As it turns out, this was a profitable move for Apple. When customers shop on iTunes, they're less fixated on price, more sensitive to the selection and their own musical tastes, and more willing to buy more tracks.