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Latest Pricing Insights

Cost-Plus Pricing: Why You Should Never Use Markup Pricing

Posted by PriceBeam on February 6, 2017

Cost-plus pricing is a pricing strategy where you set your price by adding a fixed markup (typically a percentage) to the unit cost of your product or service. It’s a simple method and the first they teach you in the Marketing 101 class - but in reality, you should NEVER use it.

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Topics: Pricing, Pricing Strategy

McDonald's Sued Over "Extra Value" Price Bundle

Posted by PriceBeam on January 31, 2017

Price bundling refers to when several products or services are sold together as one single package. It is commonly used by sellers to limit the transparency for the buyer, so the buyer can’t scrutinize the price of each product in the bundle and whether or not this is in line with his or her willingness-to-pay. Thus, although the products are discounted, the seller can increase profits by selling products that the buyer wouldn’t else have bought.

McDonald’s meals are examples of this concept, and the fast food chain recently got into trouble over their “Extra Value Meals”, where they bundled cheeseburgers with drinks and fries. Customers were complaining that the bundle price was higher than each item bought separately, and while it is perfectly legal (and sometimes a very effective technique) to bundle products at a total price that is higher than the individual product prices added together, the claim that the bundle offers “Extra Value” has now resulted in a class-action lawsuit against the fast food giant.

Per Sjöfors discusses unbundling, and how it can be used to retain angry, price sensitive customers in his ebook.

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Topics: Pricing Strategy

Customer Willingness to Pay: Implications for Your Business

Posted by PriceBeam on January 30, 2017

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.

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Topics: Pricing Strategy

Moral Hazard in Pricing: Know your customer's price sensitivity?

Posted by PriceBeam on January 25, 2017

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.

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Topics: Pricing, Pricing Strategy

Pricing Strategy Review: Is pay-what-you-want the way to go?

Posted by PriceBeam on September 27, 2016
One can argue if "pay what you want" really is a pricing strategy or not. But let's say it is. At least for those customers who actually pay. "Pay what you want" is exactly what the term mean. You offer something to your clients, and they decide if they want to pay for it or not. These customers have a choice of paying or not. Another way of thinking about this pricing strategy is an honor system. 

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.

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Topics: Pricing, Pay-What-You-Want-Pricing, Pricing Strategy

Psychology of Pricing: Understand How Your Customer's Mind Works

Posted by PriceBeam on September 10, 2016

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.

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Topics: Pricing Strategy