Demystifying a pricing strategy

A simple pricing strategy can be broken down into a few key things to settle on once you have the product as a prerequisite:

• The list price of the item (e.g. $20)
• The price unit/metric (e.g. $20 per shoe) that you add more of
• The package of what is included (e.g. shoe laces + the shoes themselves) vs. charged for separately (extra shoelaces)
• The volume discount structure if applicable (e.g. buy 100 shoes, get 10% off)
  • The promotions structure if applicable (e.g. buy two pairs, get athletic shorts free)

But here’s where it gets interesting. Markets are unique. Take shoes. There are mass market shoes, athletic shoes, high-end luxury boots, and sandals to name a few. How you decide on a choice above implicitly assumes a pricing strategy.

Here’s a simple example: does a $20 vs. $200 list price represent a different pricing strategy? You bet. In the first case ($20) you’re going after a mass market and need lots of volume and a higher frequency of purchase.

In the second you need to cultivate a high-end brand and provide superior customer service to justify your price. These are much different companies. Just ask Nike and Christian Louboutin if they think they’re in the same business.

So how do you decide on a pricing strategy? Start talking to customers and ask them how they value and trade-off price vs. what’s included in the product! Internally you should follow these steps to have an opinion on how to price:

Step 1: figure out if you want to sell to everyone or just a few people and set the list price accordingly

Step 2: figure out what’s included in the minimum package by asking customers what they value as tablestakes vs. critical vs. differentiator features – if something is high value but few customers want it consider charging separately

Step 3: figure out how you will let customers scale up their purchases with additional volume for predictable discounts

Step 4: figure out how you will make the product better over time and share that growth with your customers while building a sustainable business