For companies to pursue a pricing strategy that is tailored to their marketing environment, maximizes profitability and minimizes the risk of leaving money on the table, knowledge of customers’ willingness-to-pay (or WTP) is crucial. Despite significant advancement in pricing research that now allows you to measure the customer’s willingness-to-pay with great accuracy, researchers have found that as little as 8% of companies use this best-practice approach when developing their pricing strategy.
Topics: Pricing Strategy
The concept of price sensitivity tells us that, generally, a price increase will cause your most price-sensitive customers to start looking for alternatives as their willingness-to-pay no longer exceeds the value they place on your product or service. But just how price-sensitive are your customers? This will, to some extent, depend on the number of substitutes available, and therefore it is crucial to understand who your customers are and if they do, in fact, have any substitutes available to them.
There are a few well-published occasions where a "pay what you want strategy" has worked very well. In music, artists have offered their product for download in return for a payment of the customers choice. Having customers pay for downloaded music, or not, works because the cost of a download is virtually nill, and anything an artist may receive for an album or a song is better than what they would receive if it is pirated and better than the minuscule compensation they receive from the music streaming sites. But for artists, there is another variable, the network effect. As an artist, you would want people to listen to your music, to talk about you, to talk about your music. For your band or you personally to become a brand. To use the brand value to drive visitors to the concerts and shows. So a "pay what you want" model for an artist has little to do with making profits on the thing you sell.
Every time we make a purchase decision we invoke the psychology of pricing. The price of your product or service is the most powerful and the most effective marketing message about the quality and the benefit provided. If the price is too low, prospective customers will believe that the quality and benefit will be missing, if it is too high, higher than those prospective customers expect, or higher than alternatives, they will not buy. From this also follows that the lower the price, more and more prospects will think your product or service is too cheap, and the higher the price, more and more of your prospects would think it is too expensive.
Topics: Pricing Strategy