Pricing is an often ignored component of marketing strategy, yet it is important for its contribution to sales and profitability. Social network marketing strategy requires a subtle re-thinking of pricing and new pricing strategies.

Certainly, as mentioned in response to my post on pricing strategy from Tuesday, pricing is just one element of the marketing mix (price, product, promotion, and place — distribution). Ignoring any of the elements in building your marketing strategy can be fatal and price is the element that often gets ignored.

Often, prices are determined by simply adding a mark-up to the acquisition cost or charging what the competition is charging, but these are ineffective pricing strategies.  These strategies might be leaving money on the table (if consumers might be willing to pay more) or reducing sales as prices are determined to be too high by some consumers who might otherwise buy your product.

Pricing Strategies in Social Networks

Penetration Pricing -

Penetration pricing involves charging a low price to attract customers.  This might be done for a new product to encourage trial of the product or it might be done to increase market share.  Commonly, penetration pricing strategies are used for a defined amount of time — until some target sales volume is reached.  After the sales goal is reached, prices commonly increase.

Marketers using social networks understand the concept of penetration pricing very well.  Social network marketing firms often offer low cost or free content, including webinars, ebooks, instructional videos, blogs, newsletters, tips, or advice.  Free content is offered as part of a marketing strategy to demonstrate the value of paid tools, attract customers and prospects to the website, and gain a reputation as an expert.  Social media experts hope free content will build trust, encourage sharing across users social networks that further build the expert’s prospect base, and ultimately allow them to make money from their social network marketing efforts.

While social media marketing experts understand the importance of penetration pricing, novices and the uninformed fail to appreciate its importance and attempt to monetize their websites and other social media too quickly.  Social network marketing is DEFINITELY a pay it forward situation where pushing affiliate marketing programs or selling advertising before giving visitors and network members an incentive to allow marketing efforts is a HUGE mistake.  Marketers who fail to provide value as part of the exchange will find themselves unfollowed, unfriended, and with few visitors to their blogs.  They may also be reported as spammers and have all access to the social network blocked.

Price skimming -

Price skimming involves charging a high price initially with the intent of reducing prices as consumers willing to pay higher prices have their needs fulfilled or more competition enters the market.  This strategy can ONLY be employed with radical innovations, such as HDTV, when originally introduced.  Price skimming requires that there be:

• few substitutes for your product
• you have a measurable advantage over existing products
• consumers have different elasticities of demand
• a means for reaching customers with different elasticities exists

Price skimming can also be a strategy for price discrimination. Price discrimination is a pricing strategy designed to maximize profits by charging different groups of consumers different prices.  As an example, airlines attempt to charge business travelers (who generally possess inelastic demand since profits are a function of their travel) more relative to personal travelers (who have more elastic demand and might be willing to drive, travel on different dates, of forgo travel if they don’t get a reasonable price).  In the case of airlines, they use rules such as advance booking and Saturday night stays, to separate business and personal travelers.

Price skimming can also be used in revenue management (or yield management).  Revenue management is a strategy for charging customers different prices depending on how valuable they are to the firm.  Thus, customers who require more services, get charged higher prices.  Using an airline example again, customers who check their luggage at the airport pay a higher fee than those checking their luggage online as checking at the airport requires more resources.

In social networks, possibilities exist to use price skimming, although caution must be employed to avoid negative reactions from customers when they find they’re paying a higher price than other customers.  Thus, charging one price in one social network and another in a different social network would probably be viewed very negatively.

To avoid this, there are two solutions — hide it or allow customers to self-select which group they fall into.  Hiding price skimming is commonly done in ecommerce by getting some customer information prior to displaying a price.  For instance, consumers may be asked for their zip code prior to receiving a price.  This allows etailers to charge differently based on geographic area such that more consumers in more affluent zip codes see higher prices than those in less affluent zip codes.

Allowing customers to self-select requires encouraging them to behave in certain ways — like checking their luggage online or doing online banking rather than going to the bank.  In social networks, you might charge less to customers who help influence others in their social network to buy your products.  For instance, you might offer a discount price to the Foursquare “Mayor” of your location or offer discounts to consumers who become fans, recommend your product, etc.