Price as a Marketing Tool
The influence of marketers is not confined to billboards, TV commercials, or digital ads. The greatest marketing minds will use any business tool available to drive sales, including manipulating price. Creative pricing strategies are leveraged every day to increase revenue and keep products moving off the shelves.
You know some of these marketing strategies already. Retail companies have used price as a marketing tool for decades, leveraging discounts and coupons to sell billions of dollars in merchandise. This is despite their tactics being somewhat obvious, even to their best customers. After all, how do you turn down a sweater that’s twice-discounted to less than 70 percent off the original sticker cost? Discounts are a simple, powerful example of price marketing in action.
But there are dozens of pricing strategies that are less obvious. These are used every day to drive sales or act as a magnet for brand attention. In this article, we’ll investigate four ways you can use price as a marketing tool in your business.
Using the Highest Price to Raise the Average Order Value
When a restaurant wants to raise the average order value for wine or appetizers, all they have to do is raise the cost of the highest-priced item. Hermann Simon, the author of Confessions of the Pricing Man, explains this phenomenon:
When buyers know neither the price range of a product category nor have any special requirements (e.g., high quality, low price), they gravitate toward a price in the middle of the range. What does this mean for sellers? Quite simply, it means that a seller can use the price range in his assortment to steer customers toward certain price levels and away from others.... After looking at the wine list, most guests order a wine with a price in the middle of the list. Only a few guests opt for the most expensive or least expensive wine. The middle has a magical allure.
By raising the highest price, the middle price also goes up — a fact marketers use to get the average customer to spend a little more money.
From a professional services perspective, giving tiered pricing like this also ensures you never leave money on the table. I’ve used this tactic before in my copywriting business. By offering multiple options in my statement of work, from low-cost to mid-tier to premium, my proposal no longer poses a “yes” or “no” question. Instead of accepting or declining the offer, clients simply choose the value and cost that works best for them.
Disruptive Pricing to Attract Free Media Attention
Jeff Bezos famously said, “Your margin is my opportunity.” Entire companies are born from offering lower prices than their competitors. When these price reductions occur within an industry where high rates are standard, these price-disrupting companies often become a magnet for positive media coverage.
Founder Charles Schwab experienced this in the 1970s as he was getting his new low-cost investing company, Charles Schwab Corporation, off the ground. In those days, investing was an expensive endeavor. Low fees weren’t commonly available like they are today. One day Schwab met the famous syndicated finance columnist Dan Dorfman at the Four Seasons in New York City. Schwab handed Dorfman a rate card for investing through his company.
Dorfman was immediately intrigued. He had a waiter bring a corded phone to the table and called Merrill Lynch to compare their rates. The difference in cost was so radical that Dorfman featured Charles Schwab Corporation in a column that was syndicated across hundreds of publications across the United States. Schwab recalled in his autobiography: “That one article was worth more to my growing business than a year’s worth of paid advertising.”
Modern examples of disruptive pricing attracting media attention include Tesla in the electric cars space and Warby Parker in the glasses industry. The media loves a good disrupter.
Shipping as a (Pretend) Loss Leader
In 2005, Amazon introduced Amazon Prime, an annual subscription membership that would go on to spark thousands of copycats across e-commerce and software-as-a-service (SaaS). At the time, Amazon charged customers $9.48 for two-day shipping. Amazon Prime would offer customers unlimited free two-day shipping for an annual fee of $79. For frequent Amazon customers, this offer was a no-brainer.
But we all know how this story ends: Amazon was the real winner here. Today, revenue from Amazon Prime subscriptions alone reaches into the billions.
Amazon single-handedly — and permanently — raised the bar for convenience in online shopping. That, in turn, forever changed the types of products shoppers were willing to buy online. Need a last-minute gift or nearing the end of a pack of diapers? Amazon was now an alternative to the immediacy of brick-and-mortar stores.
In other words, Amazon used two-day shipping as a loss leader to help bolster its brand and revenue to become the marketplace giant it is today.
Smaller e-commerce companies use similar tactics every day to increase their average order value. Every time you reach a checkout screen and see “Free shipping for all orders over $50,” you’re seeing price marketing in action.
Low Dollar, High Cents Pricing
Let’s end on a practical note. One element of marketing is playing with perceptions, using subtle elements of human psychology to nudge buyers closer to a purchase. Sometimes a simple tweak to how you price your products or services can result in immediate improved sales.
Consider 99-cent pricing as an example. As Hermann Simon writes:
Customers perceive the digits in a price with decreasing intensity as they read from left to right. The first digit in a price has the strongest influence on perception; that is, a price of $9.99 comes across as $9 plus something rather than $10. Neuropsychologists have confirmed that the further to the right a digit is, the less influence it has on price perception.
As we’ve seen, some businesses are defined by their prices — affordability is part of their brand. Other businesses use price to pull the right psychological strings that cause consumers to spend a couple more dollars with every purchase. No matter how you choose to use price in your marketing strategy, it should at least be part of the conversation. How you choose to structure your costs may be the most prodigious marketing decision you make this year. Or, like Amazon, among the best marketing decisions in the history of your business.