4 ways to get your pricing right

In my work as a consultant and a mentor working with creative startups, one of the biggest issues I find myself offering advice on is the tricky topic of pricing. I work with companies large and small (and, increasingly, students with great ideas for products) and one area they find difficult is finding the right pricing strategy.

Get the price right and everything falls into place. Get the price wrong, however, and you can find yourself struggling to make sales before you've even begun. At the end of the day, your price is a story and how you tell that story matters.

The following are some tips I've shared with companies offering digital products and services to ensure they sell more and manage their cash flow as effectively as possible.

01. Go freemium

When the monetary barrier to entry is zero, you significantly increase your number of potential customers. This is one reason why freemium models work so well.

The term 'freemium' was coined by Jarid Lukin in 2006. Noted venture capitalist Fred Wilson invited his readers to coin a term for his favourite business model, which he described as follows: "Give your service away for free … acquire a lot of customers very efficiently through word-of-mouth, referral networks and organic search marketing; then offer premium-priced, value-added services or an enhanced version of your service to your customer base." Lukin suggested 'freemium' and the word stuck.

Embracing a freemium model allows you to grow your customer base quickly by removing the inhibition customers face when they're asked to pay for a product. At Get Invited we offer free entry-level pricing to allow potential customers to try out our product. By removing the cost barrier to entry, we encourage potential customers to sign up and try the product.

Apple's App Store uses a similarly seamless approach to encourage customers into its ecosystem: by enabling upgrades for free products through in-app purchases. It's no surprise to see the number of apps in the App Store that are embracing this model is growing. It lowers the price of entry to zero, resulting in more downloads.

02. Price according to value

Over my two decades of working with early-stage businesses, I regularly hear a variation of the following: "…but I would never buy [insert your product or service here] for $2,500!"

This might be true. You might not spend $2,500 on, for example, GitHub's Enterprise Tier, but you – equally – might not be the intended audience for this well designed and seamless service. Or at least, not yet.

Never set your pricing based on what you would pay for something. Instead, set your pricing based on the value you think it holds. Price is a story. For every thousand people happy with the functionality and scope of GitHub's Personal tier, there will be many more looking for something a little more heavy-duty. To these customers, price might be no obstacle.

Right now you might be happy with GitHub's Free or Personal tiers, but who knows? At some point in the future you might be the target market for an Enterprise solution. Price accordingly and never forget that others might have more income to buy in at higher price points.

03. Build a pricing pipeline

When pricing products, there are ways we can stack the deck in our favour by building what I call a 'pricing pipeline'. In this, different pricing tiers are considered: low, middle and high.

Tiered pricing affords potential customers more opportunities to make the final purchase. With just one price point your users are faced with a binary choice: 'buy' or 'not buy'. If you consider additional tiers, you increase the potential number of 'buy' responses. This strategy maximises the chance of a purchase by shifting the question from 'Will I buy?' to 'Which will I buy?' A subtle but important difference.

Let's look at an example. WidgetCo offers a single product at one price point – the choice here is a simple yes or no: 50/50. AwesomeWidgets, on the other hand, offers three tiers at three price points (Basic, Enhanced and Premium). This pricing pipeline works in AwesomeWidgets' favour, shifting the odds to its advantage: 75/25.

Companies like GitHub use pricing tiers to suit every budget. As a customer's needs grow, so does the amount of money they're willing to part with.

04. Consider discounts and bundles

Discounts and bundles are a great way to add value for potential customers. This is why we see so many 'Buy one, get one free' offers in supermarkets: everyone likes a bargain.

Consider offering occasional discounts, or if you have multiple products, bundles. These will help drive sales and, in turn, help your bottom line. Yes, you might lose a little on every sale, but that loss will be more than made up for with an injection of income, helping your cash flow.

I use this approach for my two books on The Craft of Words. Offering the books – which are designed to be read together – for a discount offers customers an incentive to buy them both, resulting in increased sales.

Consider making discounted offers time-sensitive. This brings a little psychology into play: 'I need to get this now, before the offer expires'. Setting limited times for offers helps promote purchasing behaviours.

It's also worth tapping into the power of 'loss aversion'. Airlines like easyJet use this approach to promote purchases by letting you know that there are 'Just three tickets left at this price!' No one wants to miss out on a deal, and if you're planning on travelling anyway, now's the time to get one of those three tickets.

We all like to be paid for what we make, and when we make great products, we deserve to be paid. Ensuring we tell great pricing stories and offer our customers choices that match their needs helps the bottom line. It's a win-win situation.

Learn how to make money at Generate London! Brad Weaver will be hosting a workshop on how to start and build a profitable design business, and he'll also be discussing the tricky business of pricing your work. Book now!

This article originally appeared in net magazine issue 281; buy it here!