The price of a product or service usually doesn’t get the attention that it deserves. Business owners are often gun-shy about their prices. They are afraid if they are aggressive and charge high prices, they will lose their customers and drive business away.
When you think about it, your price is a statement about what you believe the value of our product or service is. It is a positioning statement. For example, if a customer goes to a cosmetics counter and sees a $2 lipstick and a $10 lipstick, the higher $10 price is a statement of higher quality or being a luxury product, especially if supporting advertising and branding gives that message. If the customer is a husband buying a gift for his wife, he will likely choose the $10 lipstick, because it is “reassuringly expensive”!
Where is the value of the product or service determined? Isn’t it determined in the mind of the customer? The customer decides the value of the product or service based on what the product or service does for the customer. This is called the subjective theory of value.
During the Industrial Age, businesses mostly used a cost theory of value. Many businesses still use cost for a “rule of thumb” for pricing what they offer, from 10 X cost for jewelry to cost + 5% for groceries. The fact of the matter is the customer has little or no concern for the cost. The customer is concerned about what the product or service does for him or her.
Let’s say I have a 10-minute recording that gives clear instructions on how anyone can earn $10 million, with little cash investment and no exceptional skill. The cost of the recording may be zero or less than $1. What is the value? Certainly much more. Would you be willing to pay $1,000 for the recording? $10,000? More?
Instead of basing the price on costs, a business should evaluate whether it can deliver the value as determined by the customer at a profit. By having this target, many companies, such as Toyota, have been able to create efficiencies and design modifications to make that price work.
How can you find out the customer’s value? Sometimes, in a bargaining situation, you can ask for the customer to make an offer. Another way is to use different prices in split tests. You can also make modest increases and just watch customers’ reactions, but you are probably still leaving money on the table. For unique items, auctions can determine the highest price. EBay is popular for that approach. It’s also used for collectibles by auction houses like Christie’s and for the bidding process for selling homes.
What about the fear of losing customers if you raise your prices? Often what the business finds is they lose the customers that don’t appreciate them — such as the chronic complainers. When you lose those customers, you’re making room for better customers.
Say you raise the price of a product from $10 to $20. The cost of the product is $5. Your fixed costs are $100,000. The breakeven sales at $20 is $100,000 / $15 = 6,667 units. The breakeven sales at $10 is $100,000 / $5 = 20,000 units. So, you can lose 13,333 sales and be no worse off financially, but with less work required. Think about the additional profit if your sales only decrease by 10%, or 2,000 units. 18,000 X $15 = $270,000. 20,000 X $5 = $100,000. $270,000 – $100,000 = $170,000! This is an extreme example, but one worth thinking about and experimenting with for your products or services.
What about your competitors and their prices? If your product or service is positioned as a “commodity”, then the “going rate” will dominate. Almost every product can be positioned as different, such as being “for” some distinct group. For example, pens can be offered “for medical doctors”. What experience or transformation can be included in what you offer? With some imagination, you should be able to distinguish your business from your competitors. For example, most people would place Federal Express in a higher position than UPS or the post office for delivery services.
In order to succeed with higher prices, you must deliver a higher value in the eyes of your customer.
Another consideration is your own attitude. You must sincerely believe you deliver a valuable product or service and be able to state your price to your customers with a straight face. This can require some practice in front of a mirror or with a rehearsal partner.
Would you like some support thinking through pricing decisions? To schedule an initial consultation, please write to me at firstname.lastname@example.org.