One of the most intriguing and complex issues in a marketing strategy is the choice of price: there are many theories about it, but all share the idea that price is a determining and vital factor in a business.

The price is not only a representation of the monetary value of the product/service, but it is also the element that determines the marginality of a company.

‍To survive, a business needs marginality: to obtain it, it is not enough to increase prices without a strategy, otherwise you only risk losing customers!

As we will see in this article, it is important not only to choose adequate prices, but also to plan a strategy that increases them over time. By doing so, it will be possible to:

1) Increase margins, thus having more money available to acquire new potential customers;

2) Increase the perception of value of the product/service.

According to one study According to Science Direct, conducted on a sample of Fortune 500 Companies, the minimum increase in prices also involves a proportional increase in profits.

As illustrated in the following image, in fact, a price increase of 5% led to a 12% increase in profits and 22% growth in EBIT.

Without going into further details related to the numbers, which may vary from the type of business model adopted, it is clear that increasing prices over time can help maintain customer expectations.

According to an interesting item by Price Intelligently, in fact, increasing prices with accurate strategic planning is essential in order not to devalue the product.

If a company keeps prices unchanged over time, it risks no longer making the value of its product perceived, even in the eyes of already loyal customers.

The graph below shows how important it is to adjust the price of products over time, so as to increase the perception of their value in the eyes of new potential customers and also of those who are already a regular buyer.

Don't worry, there will be a way to learn more about this concept later and see how to implement a correct price increase strategy in practice.

However, before proceeding, it is advisable to take a step back and understand not only why it is important to increase prices, but also the risks that arise when you choose not to.

The main dangers associated with an incorrect pricing strategy are:

1) The risk of not transmitting the true value of a product/service and of not being perceived as the appropriate solution to that problem;

2) Have no margins, so a business that will struggle to survive over time;

3) Ending up in the war to the bottom of prices, identifiable as the direct consequence of the two previous points

Be careful though, the solution is not as simple as it may seem:

Doubling the price, without a proper strategy, can be counterproductive and reduce sales!

According to a further The analysis by Price Intelligently, it is not enough to add a zero to alter the perception of value of the asset for sale, and as you can see in the following graph, a price increase of 250% leads to profound dissatisfaction if the increase is not justified.

It is much more profitable to adopt a system of small and frequent price increases using the strategy that I will list step by step in this article.

When to raise prices?

Here are 3 situations where raising prices is an optimal choice:

1) After a increase in sales. When consulting the Price Intelligently website, companies that have registered an increase in revenue tend to review their prices about every 3-6 months;

2) After the introduction of new features and characteristics that may interest your potential customers.

This situation is suitable for all those companies that use a lean methodology, with an improvement process, exploiting customer interaction and feedback.

3) If your product Create greater value than I expected. Higher value means an advantage for the consumer in economic terms, time savings and/or risk reduction.

You can obtain this aspect with interviews and testimonials that help you understand the advantages offered by your product; these activities are very profitable because they will provide you with useful information that you could not have arrived at without feedback from the buyer.

We can therefore say that, if one or more of the situations listed above occurs, it is necessary to consider the idea of a price increase with the addition of a good communication strategy that can support it.

Before seeing an operational framework on how to create a price increase strategy, however, it is advisable to close the circle and highlight the mistakes not to make.

From the previous graph, we saw how a 2-300% increase in price causes dissatisfaction in the minds of customers. Why?

The cause is the anchoring effect.

Without going too technical, this term refers to the consumer's tendency, when he has to decide to buy a good or service, to use as a method of comparison the first economic information he received about that good.

In the buyer's mind, an association is therefore created between the price of the product and its monetary value; doubling or tripling this price, without an adequate communication strategy to motivate the increase, will cause him deep dissatisfaction since the value of that asset will still be anchored to its initial value.

For this reason, it is important to increase prices gradually, so that the initial anchoring is not an obstacle to the perception of the actual value of the product. Another very common mistake when choosing and communicating the Pricing is to consider only the benefits of the product/service.

What do I mean?

Although it may seem like a very counterintuitive concept, we are much more careful to avoid a loss of money, than the possible gain that this may create.

Several experiments and studies by D. Kahneman (Nobel Prize in Economics in 2002), have shown that the pain of a monetary loss is about two or three times the pleasure of obtaining an equal gain.

For example, if you were to lose 100€, to compensate for this pain, a win of this amount would not be enough, but a much larger gain would be necessary to feel satisfied.

This effect, also called loss aversion, can also be used in a pricing strategy (as we will see in an example below).

Considering these two effects will allow you to better perceive the value of your product/service.

Value and Value Based Pricing

Usually the price is set:

• following the competitive orientation, adjusting the price of competitors upwards or downwards (46% of companies)
• adding a markup to the cost, in the final sales price (37% of companies), that is, a cost plus-pricing.

(data taken from research made on B2B European market, 2016)

However, these are superficial strategies, because they do not consider a fundamental piece of the equation of any economic transaction, that is, the Value Based Strategy.

Unlike other cost-based and competition-based methods, the VBS determines the price of a product by essentially considering the value perceived from the customer's point of view and consequently also on his willingness to pay.

Therefore, it does not only consider costs and competition, but puts the customer at the center of the entire transaction, because he will decide the purchase.

Only 17% of companies use a Value-Pricing method, despite being the most effective! In fact, if the customer believes that that particular 'product' is not worth this monetary outlay, the transaction will not take place.

In their buying process, customers seek well-being and their satisfaction: for this reason they consider the product as the solution to a problem and believe that thanks to its purchase they will obtain certain benefits, all in relation to the sacrifice made to obtain it (the price to pay).

The focus is not only on considering the purchase cost or the competition, but on generating value to the customer, so that they can buy back the product and become loyal

In this way, the company will achieve a competitive advantage in the long term because it will have a Life Time Value of the customer much higher than the competitors, and as a result he will never end up in the price war.

This implies that the company will be able to afford to “spend” more money to acquire new customers and thus raise the entry barrier, creating a competitive advantage in the market.

Let's see a practical example, in a very competitive market such as that of mattresses

How could I make people feel the value of a mattress?

1) Show the Direct Benefits of the product

The skill in this case consists in putting yourself in the shoes of the customers and understanding what interests them most.

In practice, marketing consists of transforming technical characteristics into advantages for users.

Let's be clear: The end customer is hardly a memory foam expert and probably doesn't even intend to become one. What interests him is to change his old mattress and sleep better.

End customers are not interested in becoming product technicians, but in the advantages they will have!

An example of effective communication aimed at valuing the benefits of the mattress is that of Emma who did not put the classic technical data sheet as an instruction booklet, but illustrated the operation of each component and the direct benefits it brings to the user.

You must remember, therefore, that the more you know your target and their needs, the greater your sales communication will be.

2) Show how you solve their problem, how much it is costing them not to do it and the benefits they will get!

Let's take a practical example:

Let's assume that we are selling a very expensive mattress (2990€), usually purchased by those with a large budget, such as entrepreneurs and managers of large companies.

In this case, most likely, it is not enough to list the benefits of our mattress, but it is necessary to think intrinsically about the problem.

For our target, sleep is a fundamental issue: waking up in the morning refreshed and relaxed is very important because it can determine not only productivity, but also turnover!

If an entrepreneur wakes up tired and in a bad mood, this condition will probably have a negative effect on his work, and perhaps even on the severance of a deal worth thousands of euros.

Consequently, we must think about the fact that we are no longer selling a simple mattress, since to the actual value of the asset is also added that of:

• improving the quality of sleep, which is linked to greater productivity;
• do not waste time looking for the solution among the thousands of alternatives offered by the market, since time is money and it is essential not to waste it.

In this case, to 'justify' the price of 2990 (10 times the market average), it is necessary to do a Build Up of the perceived value, not only telling the benefits of the product, but showing the buyer the disadvantages of waking up tired and in a bad mood (remember the aversion to losses seen earlier?).

I just showed you how to increase the value of a product through an emotional and economic transformation.

The mattress in this case goes into the background because what is being sold is its transformation.

The buyer will sleep much better and be much more relaxed and productive.

The idea of well-being has no value, and indeed, the buyer will more than willingly pay a tenfold price in the face of these promises.

Clearly, it will be necessary to have a product that meets expectations, and to have a marketing strategy that exploits elements of social proof such as PR and customer testimonials.

The focus of this example, however, remains that of Selling the transformation to the customer, not a simple mattress that you can find everywhere!

In general for increase the value of a product You can communicate:

1. The time savings that your solution offers;
2. The removal of unpredictable risks and unforeseen events;
3. The transformation (economic or status)

My advice is to look at your cost structure and analyze your competitors' pricing, to decide the price considering the true value of the product: only in this way will you be able to value it and obtain margins.

Let's continue the article with a framework for setting up a price increase strategy (which you can also use as a basis for determining initial prices).

Step 1 - Carry out market research

Understanding the competitive environment is important; even if the strategy will be based on the value of the product, understanding how your competitors are positioned is essential. This does not mean following or imitating competitors' prices, but thinking about how to act in that market segment.

Step 2 - Perform a qualitative analysis to analyze Elasticity

To do this you will need to understand the”Price Sensitivity Meter”; according to Van Westendorp, price elasticity can be calculated by conducting a survey among your customers to understand their willingness to pay

• At what amount would you consider the price of the product so expensive that you would not consider buying it? (Too expensive)
• At what amount would you consider the price of the product too low, so probably made from low quality materials? (Too cheap)
• At what amount would you consider the price of the product so excessive that you would have to carefully evaluate the purchase? (Expensive)
• At what amount would you consider the price of the product as a good deal, therefore produced with good quality raw materials but economically advantageous? (Cheap/good value)

It is important to follow the order of the questions because the first two force respondents to anchor themselves to an acceptable price range, while the last two help to narrow the results down to a price range that offers a good profit margin (also considering the anchoring effect seen above).

Once a statistically significant number of responses have been collected, it is possible to represent them graphically and determine a more specific optimal range and price point, as shown in the graph below.

Step 3 - Define the price increase

After completing the market analysis relating to the competition, and understanding the economic range in which to move thanks to the qualitative analysis, it is time to determine how much to increase the price (or decide how to set it).

To do this, it is necessary to consider the costs so that there is a high margin and to understand the actual value of the product, also taking into account the advantages and benefits it will bring to the customer's life.

You can think about these aspects to help you evaluate it:

• How much time and effort does your solution save?
• What risks and unforeseen events does it help to avoid?
• What is the economic or status transformation that you can promise? (Remember the mattress example?)
• How exclusive is the product? The more exclusive it is and reserved for an audience with a large economic capacity, the less friction will be if the price is high.

You have to keep in mind that there is no one process that works for all types of businesses, and that everything depends on the marketing strategy you choose to use. If you want to learn more about this concept, I recommend that you book a consultation with one of Naniza's marketing experts, so that we can analyze your situation with our experts and find with them the best strategy to apply.

Step 4 - Primary Test

Once you have defined the new price, it is important to test it on a small percentage of customers. This is because the price is not a variable that you can easily change once determined, and carrying out a preliminary test will help you get immediate feedback from your customers.

In fact, if you decide to make a price increase, you will not be able to change your mind after a few weeks by resorting to sudden discounts, since this would be seen as a devaluation of your product and would have a negative impact on its image.

For these reasons, a price increase must first be tested on a limited number of customers who are already familiar with the product and its advantages. Who better than your buyers knows if the price paid met their expectations?

Step 5 - Implementation and Launch Opportunity

After testing it and finding that the price increase reflects the value perceived by customers, who would therefore be willing to buy it anyway, we are faced with one of the most interesting phases.

The communication of a price increase is very often experienced in a negative way, as if it were a fault, but don't worry: with an appropriate market strategy Can you take advantage of the price increase as an opportunity to launch a new product, underlining the new aspects just implemented or listing the qualities already present in a new light and increasing sales accordingly.

Launches are the ideal opportunity to enter a product in the market and quickly reach the Break Even Point, acquire the first customers and maximize margins with backend offers.