It is no brainer that you should charge as much as the market will bear. But the tricky question is, how much is that? If you price it too high, your business will be seen as an unethical price gouger, which needless to say, will damage your brand. If you price it too low, your business will be seen as a ‘cheap’ commodity producer, which will be detrimental to your brand too. So, how much should you charge?
Most businesses follow one of these two approaches when it comes to pricing:
- Copy their competitors
- Adopt a formulaic approach e.g. cost to produce, apply a percentage mark-up
Very few businesses take the approach that I’m going to reveal later in this article. But first, whatever pricing method you approach, the fundamental rule is this: price your products/services below their perceived value. That does not mean becoming cheap—there is a world of a difference between cheap and value. If you need an excellent example, take a read at this article: How did Robert Kiyosaki avoid becoming a commodity? Part 2: Raise prices!?!?. In that article, you will find out how Robert Kiyosaki reframed his product from a very expensive commodity to a good value-for-money educational tool.
Note: now that I have mentioned it, I realised that understanding the difference between cheap and value is very important. I will write more about it in future when I have the time.
Before I spill the beans, here are some pricing tips:
- KISS- Keep It Simple, Stupid—Humans, by nature, are lazy. Modern Internet users are even lazier (oops, it is much more diplomatic to say that they are hard pressed for time). They don’t want to do any brain work to calculate how much they have to pay. All they want is to see one number—the price. So, if your produce/service is not complex, structure your pricing to keep it simple. And also, make the pricing prominent and position it near where they press the “Buy” button.
- Sometimes, it is better to raise prices—there are always the extremely price-sensitive clients who will haggle and bargain till no end. Extremely price-sensitive clients don’t value and respect their time and you can’t expect them to respect your time too. Worse still, they are only loyal to price—if someone offers a lower price, they will be gone in a jiffy. If you are in the service business, you will know what I mean. This type of clients will cost you more in the long run. The solution: raise your charges to price out such clients!
Now, here is the secret of finding out how much the market is willing to pay: ask them!
Wait a minute!
Who would be so stupid to tell you how much he/she is willing to pay? Of course, no one will do that. Even if they are willing to tell you, you can be sure that they will say a fib. The trick is to ask indirectly.
To do that, you must first ask them in the context of a customer satisfaction survey. Humans appreciate the fact that others are interested in them and want to serve them better. By doing that, your clients/customers will be in a better frame of mind to answer your questions. Then, you must ask a series of questions tangentially related to price:
- Ask them about your competitors’ offerings. If they don’t buy from competitors, then it is a clear sign that they are not price sensitive. If they consider your competitors, then they are the more price sensitive ones. This question will serve to segment your survey respondents.
- Ask them whether your price is too high or low. Of course, the bias will be towards the high side. But don’t probe too much—just let them talk freely. Sometimes, a lot of insight can be gleaned from what they say that is not answering the question directly. This question is just to put them in the right frame of mind.
- Then ask them what features or add-ons they want for your offerings. This will tell you what they value and be willing to pay a premium for.
- Ask them what they like or dislike about your pricing structure. E.g. is it too hard to understand? Pricing for quantity bracket is too high?
- Ask them if they prefer other ways to pay for your offerings. E.g. bundling, two-part, all-you-can-eat, guaranteed future price, success fee, rental, lease, etc.
So, by asking your clients/customers these types of indirect questions, you can find out a lot. Don’t limit yourself to these five questions—put on your creative thinking cap too.