Pricing is a critical component of your success as an organization. Get it right, and you firmly establish your value in the eyes of your customer. Get it wrong, and you might end up stuck on a rollercoaster, attempting to adjust and prove your worth.
Strategic pricing is not just about setting a number. It’s about understanding what your customers truly value and how your offering compares to their alternatives. To do this effectively, we’ll draw from the concept of the “Jobs to Be Done” Theory, which helps you uncover what job your customer is hiring your product or service to do (find a great intro in this LinkedIn learning module from David Duncan).
In this blog post, we’ll delve into three pricing methods—cost-based pricing, competitive-based pricing, and value-based pricing—while considering the unexpected alternatives your customers are comparing you to. By the end, you’ll have a better grasp of how to strategically price your offerings and communicate your value to potential buyers.
The “Jobs to Be Done” Theory
The “Jobs to Be Done” theory is a powerful framework for understanding your customers’ motivations. It suggests that customers “hire” products or services to fulfill specific jobs or tasks in their lives. To effectively price your offering, you must first identify what job your customer is hiring you to do.
For example, consider a customer who needs to get their car washed and is trying to decide whether to go to your carwash or a competitor’s. But really, their motivation is not to get their car washed—it’s to have a clean car. So you are not competing with other carwashes alone; you’re also competing with a local school’s carwash fundraiser, or the customer deciding to have their teenager wash the car for them. But maybe there’s an even higher order need. If you talk to your customers, maybe what they really want is to feel like they’re taking care of their car. In that case, you’re also competing with things like car repairs, oil changes, and air fresheners.
If you can figure out how to fulfill those higher order needs, you can deepen your relationship with your clientele, and create more loyal customers. Understanding this perspective is key to strategic pricing.
The 3 pricing methods
- Cost-based pricing: This method sets a price floor based on your production and operational costs. Selling below these costs is unsustainable in the long run. Cost-based pricing provides a crucial foundation for your pricing strategy, ensuring that you cover your expenses and remain profitable.
- Competitive-based pricing: To employ this method effectively, you need a deep understanding of your competition and their pricing strategies. Depending on your goals, you may choose to price similarly, lower, or higher than your competitors. Competitive-based pricing allows you to position your offering strategically in the market.
- Value-based pricing: Value-based pricing is the most customer-centric approach. It acknowledges that you can’t charge more than the value your customer perceives in your product or service. It’s about understanding what your customers compare you to and the price they are willing to pay for that value.
The buyer’s perspective
Ideally, when your customer looks at your price, they should be comparing it to “nothing.” In other words, they should perceive your offering as so valuable that it’s a no-brainer compared to not having it.
For instance, if someone doesn’t have a toilet, any toilet is fantastic, and they’d be willing to pay a good amount more than having none. However, if they already have a toilet, they are comparing alternatives and asking, “Why would I pay to change or upgrade?”
Identifying alternatives and risks
To price strategically, it’s essential to identify the alternatives your customers might consider instead of your offering. Natural competitors come to mind first (for example, a coffee shop competes with other coffee shops). Other alternatives might be less obvious (a coffee shop competes with a juice bar or a bookstore).
Sometimes, the alternative is non-consumption, which comes with its own set of risks. For instance, if you provide accounting services, your customers’ alternatives might include hiring an accountant, doing their taxes themselves, or even choosing not to do taxes (with all the associated risks). By making these risks apparent, you can highlight the value of your solution.
The psychology of pricing
Value-based pricing becomes more important as we enter higher-order categories. To someone who doesn’t have shoes, any pair of shoes is a luxury. But someone who owns a few pairs of shoes already may be drawn to running shoes or work shoes.
Why do people spend significant amounts on products like shoes endorsed by celebrities? It often boils down to identity and belonging. When lower-level categories like “shoes” evolve into higher-level categories tied to self-worth and community, people are willing to invest more. Your pricing should not only signal value but also align with the identity your customers aspire to.
To help you think about your pricing strategy, consider the following exercise:
- Determine what is the absolute price you must stay above to cover your costs.
- Identify your customer’s “Jobs to Be Done”—what do they “hire” your product or service to do? Consider how your product/service makes them feel.
- Map out a list of alternative products or solutions that also solve your customers’ “Jobs to Be Done”. Remember to include non-consumption as an alternative.
- Do some research to determine the costs of alternatives and the risks of non-consumption.
- Are you solving for your customers’ lower-order or higher-order needs? Reflect on how your pricing aligns with the value provided.
Strategic pricing is not just about numbers; it’s about understanding your customers’ perspective and offering them the value by solving their “Jobs to Be Done”. By leveraging the “Jobs to Be Done” theory and the three pricing methods, you can better align your pricing strategy with customer expectations.
Remember, pricing is not a one-size-fits-all approach; it’s about finding your unique value in the eyes of the buyer and communicating it effectively.