Creative Thinking Around Pricing (Part Two)
From behavioural science to the most common pricing strategies
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Pricing in complementary healthcare is a topic that comes up in my conversations with practitioners a lot. How do you know what to charge, how do you get comfortable with charging what you’d like to charge, and what might happen if you change what you charge? You’re reading part two of a two-part series on the theme of pricing, it’ll be added to the Your Modern Practice Guide selection of articles. The first article in this series covered examples from a handful of practitioners including discounted pricing, sliding scale pricing, membership pricing, and a clinic offering low cost pricing. And today I bring you an overview of the most common business pricing strategies you can use to map out where you fit in (and review if that’s where you’d like to still be), and we look at pricing from the perspective of behavioural science. My intention is to give you new insights on this subject, some food for thought on being creative with your treatment prices and the confidence to try out different approaches to discover what works for you!
The price of your treatment heavily influences the audience type you’re likely to appeal to, and how your services are perceived. You can decide on your pricing strategy depending on the career stage you’re in, the freedom you have to set your own prices, the treatment type(s) you offer, the audience you’d like to cater to and your business finances. And know that you have the freedom to think outside of the box you’ve positioned yourself in. Overall, adapting the concept of intelligent pricing when you consider the price you set today is important, as it can have long-term effects on your income over the years. For example, discounts can be a great tool to accommodate clients and welcome in new audiences but used in the wrong way it can be detrimental to your financial future as it lowers the average price for all your clients as it becomes the ‘new normal’.
It’s also absolutely worth considering behavioural science around pricing, this is the study of human interactions and decision-making. People are very unpredictable and what we think is true about how pricing is perceived by our audiences is quite literally constantly changing. On the role of behavioural science, marketing visionary Rory Sutherland has this to say:
“Most business decisions around human behaviour rely on broken binoculars. One lens uses neoclassical economics (if you reduce the price, demand will go up), while the other is shaped by market research. Both approaches are flawed in terms of the vision they give you. As a result, we tend to either take market research too literally, ignoring the say-do gap in which consumers say one thing in a survey while doing the other, or lose our imagination by focusing too heavily on decisions that make economic sense.”
So all this to say, stay creative with your pricing if you feel like a change is needed in your financial picture. Don’t simply follow what others are doing, or what one individual client might share as feedback, but test and try what works best for you and consider different perspectives. To find out where you currently sit on the spectrum of pricing strategies, I have listed below the six common pricing strategies for small businesses and things to consider when applying these in the complementary healthcare context. Consider: which of these strategies most align with your current pricing, and where would you like to switch to (if any)?
Cost-plus pricing might be the most common approach in complementary healthcare, and starts with calculating the total costs of delivering one treatment (from hourly room rental to yearly insurance coverage), then applying a markup percentage to those costs to reach your asking price. While this is an easy exercise, this strategy doesn’t take into account any external market conditions like what competitors are charging, and it means that every time your costs go up you’ll have to increase your prices which could potentially put clients off.
Competitive pricing is a tactic where you use competitor pricing data as a benchmark, so you can intentionally lower the price of your treatment to attract a wider audience. This works well if you have lower unit costs, for example a lower rent to pay, but will be difficult to sustain in the long term. When offering lower prices, it’s worth asking yourself what your reason is and your long term vision to build a financially sustainable business.
Value-based pricing is the strategy of setting prices primarily based on a client’s perceived value of your service. This isn’t an exercise in calculating the cost of delivering your treatments. Instead, see it as a market-driven strategy. With this approach you review what other practitioners are charging for similar treatments to yours, then you identifying how your offering compares and base your price on any differentiators (location, your expertise, special treatment type, products you use) and make sure it matches your own financial goals.
Penetration pricing is the strategy where the price of your treatment is initially set low to quickly reach a large fraction of the market, and initiate word of mouth. In complementary healthcare this lower price can also be set by younger practitioner as they start out or if they’re new to an area and are keen to get their first clients in to kickstart their practice. The strategy works on the expectation that customers will switch to the new brand because of the lower price, and they’ll rise their prices once they’ve built a strong client base.
Price skimming is the opposite of penetration pricing strategy, and means you initially charge the highest price your audience will pay for your treatments, then lowering it over time to remain competitive. This higher pricing could signal the higher quality of your services. The logic behind the skimming pricing strategy is that you attempt to “skim” off the top audience segment to which you appeal, at the time when your offering is new, and in doing so maximise your profit margins early on. Apple’s iPhone is a well-known example of this; each time the latest iPhone launches it seems extortionately expensive compared to previous models and other brands, yet people will queue for days to be the first to get theirs. For practitioners a product launch might be the equivalent of starting at a new clinic or introducing a new treatment type, but this strategy can be difficult to keep in the crowded complementary healthcare market.
Keystone pricing is a strategy that sets the selling price of your services at twice the cost of providing the service. This strategy is popular in retail and e-commerce as it provides a healthy profit margin for the seller and is perceived as reasonably priced by the consumer. It was first introduced in jewellery, as the industry advised against revealing manufacturer-level prices to consumers. In complementary healthcare we see less of this strategy as it’s a competitive market, but examples can be found in wellness e-commerce.
Let me know your experiences with pricing, any success stories or ways these examples have changed your approach to your treatment prices. And as always, I’m here if you’d like to have a chat about this topic 1:1!