A single price is essentially an ultimatum.
When most managers think about pricing, they harken back to their days of Economics 101: a rote downward sloping demand curve and an asterisked point labeled “perfect price.” At this optimal price, elasticity is such that it does not make sense to raise price (because the extra per unit profit is overshadowed by lost sales) nor discount (because increased sales don’t compensate for lower profit margin). If you rely on the approach suggested by this graph, pricing has traditionally been thought of as a simple search for one perfect price.
If your company views pricing in this manner, it’s not making the most of this powerful bottom-line enhancing strategy. First, a key challenge is few of us have actually seen a demand curve for our product — let alone an asterisked price point. But more importantly, even if you can determine your product’s perfect price, you end up in what I call a “Pricing Catch-22″: no matter what price you set, you’ll inevitably create missed profit opportunities. Some people would have paid more, while others would have purchased if only the price had been lower.
The way to break out of this Pricing Catch-22 is to offer good-better-best prices. Instead of creating missed pricing opportunities with a single price, this multi-price versioning strategy empowers you to capitalize on a downward sloping demand curve. Having an array of price points — low to high — allows customers to choose which price works best for them. By allowing customers to select the experience that works best for them, companies benefit by reaping higher margins from some customers relative to others. Just as important, they also grow their business by serving budget minded customers (with good versions).
A sensible rehtorical argument supporting this pricing approach.
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See on blogs.hbr.org