Pricing Strategies (Part 2)
Need to improve your product pricing strategy to maximize your profit margin? Download the Pricing Strategies (Part 2) presentation template for the most useful and common price strategy tools. With these tools, execs can evaluate customer price sensitivity and pick the right pricing for the right market to maximize profit margin for any product. The template includes slides on Kotler's Matrix, Price Skimming, Penetration pricing, Freemium Conversion, Pricing Strategy Comparison, Price Data Collection, Breakeven Analysis, Price Sensitivity, Pricing Tables, Premium Pricing, Buyer Value Survey, Internal & External Pricing Factors, plus many more. Also, read to the end to learn how a company like GoPro could use these tools to price their products.
In order to price their products, execs can use this Kotler's Matrix slide to list products on an assessment table. The value of each product is plotted from low to high across quality and price. Once every product is assessed, enter the products into each of the relevant pricing option grids on the matrix. For instance, a product with high quality, but low price is super high value. But a product with low value and high cost is a rip-off. Execs should perform this assessment for their products as well as their competitors to understand the broader market landscape. The strategy in this visualization is value-based pricing, and the goal is to position products based on their perceived place in the market relative to the competition and find a competitive edge.(Slide 3)
Another price strategy execs can use is price skimming, where a company charges the highest possible price as a product enters the market and gradually lowers it as it becomes obsolete. In this slide, the product's price, gross margin, units sold, and projected revenue are charted across four phases to track how each changes over time. Based on the fundamentals of price skimming as they apply to fad products, phase 4 represents the biggest drop in sales as the product diminishes in popularity. The last table tallies all the data from all phases for the total projected units sold, total projected gross revenue, and total projected gross margin. This way of thinking helps execs analyze every potential price strategy, which allows you to game out which strategy will provide the highest margin. (Slide 8)
Because the downside of price skimming is that it could annoy early adopters, in contrast, execs can use penetration pricing to price their products at a lower price point to enter the market. Then, they gradually increase the price as time goes on. This rewards early adopters, but is not sustainable in the long run and is usually applied only for a set period of time; just long enough to draw attention away from higher-priced competitors. (Slide 9)
Execs can also use freemium pricing to attract users with a basic version that only provides a handful of features. This is done in the hopes that the basic customers will eventually upgrade for more features. The KPI to track with this pricing model is the conversion to paid members. This conversion graph tracks active users separated by free and paid users. The white line covers the conversion ratio. It covers various products but could be edited to cover timelines or even competitors. This graphic highlights the highest free to paid ratio and highest number of paid users. The bottom is the average conversion. (Slide 14)
To makes things more interesting, let's assume the product to be priced is a fad product. The editable graph on this slide depicts three strategies across units sold and time passed. Execs can use this strategy comparison to analyze revenue generation over time across each strategy, and then pick the best one with the highest overall number of units sold. This is helpful for execs to visualize how to price fad-products.
For example, Strategy A starts the product at the $100 price-point and keeps it at $100 the whole time. It sells quite a lot, but as the product's popularity decreases over time, its sales decline. Strategy B starts again at $100 but then provides a discount that leads to a huge jump in units sold. However, after the discount, the units sold gradually declines. Strategy C starts the product at $300, then applies multiple discounts over time in a price skimming strategy like the one outlined above. (Slide 16)
Pricing data collection
So what do you do with the result of your comparison? Execs can use this Pricing data collection table to track how your pricing strategy affects your revenue, market share, customer volume, profit margin, and overall profit over time. In this example, with a product priced at $2,850 and 60% of the market share, the product sold 30,000 units, achieved a 65% profit margin, $85.5 million in revenue, and $55.5 million in profit. (Slide 14)
Price sensitivity graph
Execs can also use a price sensitivity graph to visualize how a strategy like price skimming affects the number of units sold over time. Units sold are tracked on the y axis, and price is tracked on the x-axis. This could be used with projected sales, real-time sales data, or both to assess how projections match reality.(Slide 15)
Gopro business scenario
While many tech companies use price skimming as a strategy to maximize their ROI, some have to use it as a defensive strategy when they have less pricing power than they thought. For instance, when GoPro launched the Hero 4 Session for $400, analysts warned it was too expensive. The company thought its brand appeal would shield it from the competition. In fact, it took the company two price skims - once down to $300, then again down to $200 before customers bought in. This lowered the company's gross margin from 47% down to 35%. This loss of margin increased as more discounts are offered because the company didn't have the pricing power it thought it did.
With the pricing strategy comparison, GoPro could have tested its price skimming strategy against a price penetration strategy. In a parallel universe where GoPro launched the product with the lower price first, perhaps they could have sold a lot more units and then increased the price over time. Check out the explainer video to see these tools in action.
Need the right pricing strategy tools to optimally price your products? You need this presentation. Download the Pricing Strategies (Part 2)presentation template for more slides on Breakeven Analysis, Pricing Tables, Premium Pricing, Buyer Value Survey, Internal & External Pricing Factors, plus many more to save time and hours of work.