I think there’s an important nuance to effective pricing differentiation – proprietary pricing without strong brand association is a race towards the bottom. If the only reason a customer would choose one product over a competitor’s is that it’s cheaper, the market price equilibrium would be close to cost.
There are certainly big companies that offer proprietary pricing at scale, but their margins aren’t that good. Personally, these businesses aren’t as interesting to me, since low margins create a high scale threshold for success. This limits the probability of success to a narrow band of outcomes, only when the company reaches massive scale.
The brands I admire most are those that implement proprietary pricing as a genuine part of their differentiated brand.
Warby Parker offers incredible proprietary pricing: $95 for the frame and the prescription lens is a steal. However, if it were as simple as selling a cheaper pair of eyeglasses, there would be 10+ Warby Parkers today, all selling glasses at close to cost.
Neil Blumenthal once told me that, when they were first setting their pricing for their eyeglasses, they contemplated pricing their glasses at a much lower price; their incredible cost structure certainly allowed them to. However, they ultimately decided that if they priced their glasses at too low of a price, it would have contradicted the brand value of perceived high quality.
With the $95 price point, they were able to achieve that rare balance of a perceived high quality product at a lower price point. (Typically, it’s either high quality, high price; low quality, low price.)
Another example of proprietary pricing as it relates to brand is related to shipping. Traditionally, one of the most important e-commerce metrics is return/loss rate; you want to minimize the amount of product that people return because it’s very expensive to process them.
However, brands like Bonobos and Warby Parker1 introduced free shipping both ways against this belief. Instead of getting destroyed by returns (of course, there are probably a few customers who exploit this to an extreme, but this number is small), it actually increased conversion rates to purchases and increased brand loyalty.
Also, the paradox of choice dictates that adding an additional shipping option feels like a chore to the customer. Even if they were excited about the product they were about to purchase, most checkouts out there still have a terrible user experience and are a bucket of cold water on otherwise great brand experiences.
Amazon Prime is a great example of shipping done well – by pricing the free two-day shipping into their model, and reducing the cognitive overload of picking the shipping option, they actually create delight for their top tier customers.
In fact, in addition to creating that perceived premium quality brand, by pricing free shipping and returns into your pricing model, the economic effect is likely net positive.
It doesn’t matter what you’re selling online: clothing, electronics, software as a service, hardware, publications, iPhone apps, virtual goods; the same rules apply, because they are in many cases the same people buying these things. The main constant is that understanding the psychology and emotions of your customers is paramount to building an optimal, authentic, branded pricing strategy. What matters is that your customer feels they are getting a good value for their money.
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