Mastering the pricing of your services or products is not just a strategy—it’s a necessity. In order to avoid the trap of commoditization, you must assert control over your pricing. In this blog, I’ll explore how your business can unlock pricing power by understanding buyer psychology, overcoming some common pricing fears, and implementing effective strategies to enhance perceived value.
Understanding the psychology behind purchasing decisions is crucial. As Zig Ziglar said, “People buy on emotion and justify on logic.” Additionally, consumer behaviorists and marketing experts share that people need to feel something to do something. Pricing is a deeply emotional aspect of making your customers feel the way they need to to move them to action.
To convey good value to your customers via your pricing, tap into the emotional triggers that influence buying behavior.
Emotional and Logical Drivers
Many competitors sell based on logical arguments—features, benefits, and costs. However, to truly differentiate, your business needs to appeal to emotional drivers. Maslow’s Hierarchy of Needs gives us some hints towards the feelings customers might require as they make decisions about your products or services.
1. Physiological Needs: These are the basic requirements for human survival: food, water, shelter, air. In business, this translates to the foundational promises of a product—it’s essential functions and reliability. Meeting these needs ensures that customers trust the product and see it as necessary for their basic requirements.
2. Safety and Security: Customers seek assurance that the product will perform as expected, giving them a sense of security. This involves warranties, guarantees, and the overall reputation of the business. When customers feel secure, they are more likely to invest in the product.
3. Relationship Needs: Human beings are distinguished by their desire to be loved and to love. They want to feel like they’re part of a group and that they belong. That means creating a community around your brand. Building strong relationships through excellent customer service and personalized experiences can enhance the emotional connection customers have with your brand.
4. Esteem Needs: Customers want to feel significant. Often, products that confer status or recognition can command higher prices. By positioning products as symbols of success or exclusivity, you can appeal to customers' desires for esteem.
5. Altruistic Desires: Customers aspire to be part of something bigger than themselves, such as a mission or cause. Aligning products with these higher ideals can create a powerful emotional connection. When customers believe that their purchase contributes to a greater good, they are often more willing to pay a premium.
Applying Maslow’s Hierarchy
When businesses address these tiers, they can move beyond just fulfilling basic needs to satisfying deeper emotional and altruistic desires. For example, during my tenure at TNB, selling to credit unions involved connecting with customers’ commitment to being forces for good. We emphasized how our credit card solutions could help them achieve their higher mission, thus enhancing our pricing power. By aligning our product with their emotional needs and goals, we were able to justify a higher price point.
Ask yourself five questions:
By answering these questions, you can better articulate your value proposition and justify higher prices. It's about understanding not only what you provide but also how it impacts your customers on an emotional and practical level.
Many businesses mistakenly focus on gaining market share at the expense of profitability. However, prioritizing profit is often the smarter move. Take Apple as an example.
You probably think Apple dominates the smartphone market. However, as of Q2 2022, Apple held only 16% of the global smartphone market – a small percentage of the overall market. Despite this, Apple controls 57% of the premium segment (wholesale price of $400 or greater), and 78% of the ultra-premium segment.
Apple’s strategy illustrates that they aren’t trying to be everything to everyone. They’ve clearly identified where they want to compete and focus on owning those markets. This approach is even more evident when looking at Apple's share of operating profit, which is around 80%, significantly higher than Samsung’s 20%, even though Samsung has a larger global market share. This example underscores the importance of identifying and focusing on profit pools—segments where you can make the most money.
When we first start working with clients, we break the habit of focusing on revenue growth and instead focus on profit growth. Their top-line sales might stay flat or even decline in the short term while bottom-line profits grow. This ensures sustainable growth and profitability in the long run.
As a business coach, I’ve worked with hundreds of CEOs and their teams. A significant psychological barrier to commanding higher prices or raising prices is loss aversion—science says the fear of loss is twice as powerful as the desire for gain.
Having witnessed this first-hand, I can confidently tell you that the biggest hurdle in implementing price increases is often internal—stemming from fear and limiting beliefs:
1. Fear of Losing Customers: Many companies fear that raising prices will drive customers away. However, this is often an unfounded fear. Conduct tests to see how customers react; you may find that only the least profitable customers leave. By focusing on retaining high-value customers, you can maintain profitability even with a smaller customer base.
2. Inability to Win New Business: This belief assumes that customers buy solely on price, which is rarely the case. Highlight the unique value you offer to attract new customers. Show how your product or service solves their problems more effectively than cheaper alternatives.
3. Sales Representatives’ Confidence: Equip your sales team with the right tools and training to sell value rather than price. They should understand and communicate the benefits that justify the higher price. Role-playing scenarios and success stories can help boost their confidence.
4. Timing Concerns: There’s never a perfect time to raise prices. Instead, develop a strategic plan to conduct a 30-day test and implement price increases gradually. Monitor customer feedback and be prepared to make adjustments as needed.
To counter these fears, you should focus on the long-term benefits of pricing power rather than short-term risks. Emphasize the value and improvements that justify the price increase to reassure customers.
Several strategies can help your business enhance pricing power:
Value-Based Selling
Tie your prices to the value you provide. In B2B sales, the closer you are to the income statement, the higher your perceived value. Demonstrate how your product or service contributes to your customer’s bottom line. For instance, if your solution improves efficiency or reduces costs, highlight these benefits and show the ROI.
Good-Better-Best Pricing
Offer tiered pricing options to cater to different customer segments. This not only captures more market share but also encourages customers to move up to higher-priced tiers for additional value. Each tier should provide incremental benefits that justify the price difference. This strategy can help customers self-select the option that best meets their needs and budget.
Focus on Profit Pools
Identify and prioritize your most profitable customers. These are often those who provide referrals, are enjoyable to work with, or have long-term potential. By focusing on these profit pools, you can maximize revenue without solely competing on price. Develop personalized strategies to nurture and retain these high-value customers. And it’s okay if you lose some customers – it means they weren’t in your profit pool.
Unlocking pricing power requires a deep understanding of your customers’ needs and a willingness to challenge internal fears and assumptions. By mastering buyer psychology, prioritizing profit, and implementing strategic pricing strategies, your business can effectively combat commoditization and assert value in the market.
Key Takeaways
For further insights, consider reading "Peak: How Great Companies Get Their Mojo from Maslow" by Chip Conley and "Branding is Sex" by Deb Gabor. Additionally, download our Ideal Customer and Core Capabilities Questions worksheet to start evaluating how you can enhance your pricing strategy today.
Remember, you have the power to dictate your pricing. By focusing on the emotional benefits of your product or service, you can build a pricing strategy that not only sustains but scales your company to its full potential. Take the first step towards mastering your pricing power and unlock success the RISE way.
