5 Strategic Pricing Tactics to Capture New Segments, Protect Profit Margins, and Stop the Race to the Bottom
Pricing Pointers, Issue #49
In a competitive marketplace, many small businesses struggle to grow their customer base without inadvertently eroding their profit margins. While the common impulse is to compete on price, sustainable growth requires a more calculated approach to how value is structured and delivered. In this issue of Pricing Pointers, I’ve curated a set of my past LinkedIn posts (similar to Substack notes) on tactics you can use to capture new market segments without compromising the value of your core offerings.
1️⃣ Thinking a small price cut will give you a big edge?
Maybe not! The lower your contribution margin, the more your sales volume needs to jump just to break even on the profit you lose. Suppose a product has a 50% contribution margin. If you cut its price 5%, you need an 11% increase in unit sales in order to make the same amount of money as before.
And this is assuming your competitors don’t match your price cut! You may start a race to the bottom where everyone sells the same amount of product as before, but now at a lower price. Before you make that price cut, do the math.
2️⃣ Which of these two approaches is the best way for your organization to lower its fees?
Lowering the fee you charge can help more people use your programs or services. There are two main ways to do this. Let’s look at each approach, and consider what it might do.
Approach 1: Lower the fee for every user and for every unit they purchase. If you lower the fee across the board, it will have both good and bad effects on the total money your organization earns. The bad effect is that you make less money on things users would have purchased anyway. For example, if Ms. X buys 3 items at the higher fee, and she still buys 3 items after the fee is lowered, you earn less money from her.
The good effects happen in two ways. First, Ms. X might buy more items, like 4 instead of 3, because the fee is lower. Second, someone like Mr. Y, who wasn’t buying anything before, might start buying 1 or more items because of the lower fee. If your users buy more than they used to, and/or you gain new users, you can recoup at least some of the money lost from lowering the fee. And if the good effects are bigger than the bad ones, you’ll earn more money than before. If not, however, you’ll earn less.
You might wonder, “What if we only lower the fee for additional items our current users buy or just for new users?” That’s Approach 2: Lower the fee only for new purchases – whether from old or new users. Do this, and you will make more money overall. There is one caveat to this statement: the lower fee must still be greater than the item’s direct cost to your organization.
Which approach is best for your organization? Both approaches will increase access to your services and the income diversity of your users. Implementing the second approach is more challenging than the first, but it reduces the risk of seeing a drop in your fee revenue. Since each approach has its unique advantage, choose the one that best aligns with your organization’s goals and resources.
3️⃣ What if the key to more sales isn’t adding more to your product, but taking things away?
Most of us think we need to offer more to compete. But the real game-changer can be unbundling: breaking your offering into smaller, standalone pieces. This gives customers the choice to pay only for what they truly need. That’s how you win over price-sensitive customers and unlock new revenue streams. Have you ever considered unbundling one of your products?
4️⃣ Is your discount strategy secretly destroying your best product?
If you constantly put your premium product on sale, you train customers to never pay full price again. It eats away at your brand’s price image and its long-term profitability. A simple way to promote a premium item without damaging its image is through bundling. You apply the discount to the bundle, not to the premium product itself.
For example, a $1,000 product could be bundled with a $100 add-on product for a price of $1,049. The perceived value of the premium product stays high, but the customer still gets a financial incentive to purchase. Fragrance companies and their retailers use a similar strategy. Rather than temporarily lowering the price of one of their premium perfumes, they will offer a “free gift with purchase.” By offering a gift, the fragrance seller keeps the full, premium price tag on its product.
Takeaway: Discounts may erode your product’s perceived value, but bundling and free gifts can preserve it by shifting the customer incentive away from the product’s core price.
5️⃣ A free offering can be your best salesperson.
One of my favorite software tools, Workflowy, offers a free version with a monthly limit on how many items you can create. I found Workflowy so useful that I hit the cap pretty fast. I quickly upgraded to the paid, unlimited version because the tool had already proven its value to me.
This is the power of combining freemium and metering: Attract a large audience with zero risk, then let usage limitations drive your high-intensity users straight to the paid tier. Their usage intensity is an indicator of the amount of value they get from the product, and hence how much they’re willing to pay.
The Bottom Line
Smart growth means resisting the urge to slash prices across the board. By utilizing pricing tactics like unbundling and usage limits, you can capture price-sensitive segments while keeping your full-price sales intact. From here on out, stop viewing price cuts as your first lever for sales. Instead, rethink how your offers are built to ensure every new customer adds profit to your bottom line.