The conventional wisdom is that if you want to increase your sales and profits you should make your product (or service) better and easier to purchase. But suppose you deliberately made it “worse” and harder to buy. Oddly enough, doing this could benefit your customers as well as your business.
If you want to reach more budget-conscious, price-sensitive buyers, you have two choices. You can lower your prices across the board for everyone. Or, you can lower the price for just that group of buyers, and leave it unchanged for everyone else. In terms of your sales and profits, I think you can see why the second option would be the smarter choice.
It’s in the self-interest buyers to claim they care more about the price they pay than anything else. So how do you identify which buyers are really price-sensitive and which buyers are just testing your pricing backbone?
The trick is to give them a test. The test is “Are you willing to give up something valuable in order to pay a lower price.” Let’s look at three different ways to do this
1️⃣ Add friction to filter for budget-conscious buyers
The key to this strategy is recognizing that different customers value their time and money in different ways. Some buyers are time-rich, but money-poor. These individuals are often willing to sacrifice some of their time in order to pay a lower price. Their willingness to “work” for a deal signals how price sensitive they are.
Other customers are money-rich, but time-poor. They place a high premium on ease and convenience. These individuals will choose to pay full price simply to avoid the hassle associated with paying a lower price – such as queuing in line.
This means you can create a system where customers sort themselves based on their priority – saving time or saving money. The result is your discounts go to the people who care about price the most.
2️⃣ Protect your premium price with an "economy" tier
An “economy” version of your product or service version targets budget-conscious buyers that might otherwise be priced out of your market. It’s also a tool for fending off cut-price rivals. Instead of lowering prices for everyone, you offer a “no-frills” version of your product or service that meets basic needs. This protects the price integrity and positioning of your premium version.
Having a less expensive version is also a powerful negotiation tool. When a customer asks for a discount, you can point them to your “economy” version. This forces them to prove how important price is to their buying decision.
Like with effort-base price discounts, a versioning strategy reserves a lower price for buyers who’re willing to sacrifice something in return. Think, for example, of cruise ship passengers who are willing to give up an ocean view from their cabin if the fare is cheap enough.
3️⃣ Break your product into pieces and charge for the extras
Many businesses fall into the trap of selling “the works” by default. This approach alienates price-sensitive buyers who don’t want to pay for things that aren’t important for them. And it’s simultaneously giving away value to customers who would've been willing to pay extra for those things.
Unbundling is simply taking an offering and breaking it into pieces you can sell separately. You’re moving away from a “one-size-fits-all” package and toward a menu where customers can pick and pay for only what matters to them.
The classic example of unbundling comes from the airline industry. Before deregulation, airfares were largely “all-inclusive.” Now, your ticket price doesn’t include much more than a seat on the plane. Everything else is an upcharge.
By breaking your offer down to its constituent parts, you gain the flexibility to meet different budgets and needs. You turn an inflexible offering into a customizable solution that appeals to a wider audience.
Putting these ideas into practice
At the outset, I made a claim that might have seemed counterintuitive: that by making your products and services “worse” and harder to buy, you could actually improve your business and better serve your customers. Now you know why. You can reach price-sensitive buyers who’d otherwise be priced out of the market for your product or service. And you don’t have to sacrifice margin from buyers who are willing and able to pay more.
While pricing decisions can involve many additional factors, this framework provides a starting point for rethinking your pricing strategy. Moving forward, stop viewing product “limitations” and buying “hassles” as things to always be avoided. Instead, start thinking of them as strategic tools for increasing your revenue and reach.