Setting a price for your product or service is one of the most important decisions that you can make as a small business owner. Don’t take it lightly. Invest time in thinking it through.
If your customers are complaining about your price, they have no idea why they should choose you.
Price is that important. It’s a signal to your customers about what to expect. Not only that, but how you price your product will ultimately determine whether you stay in business or not.
In this blog post, you’re going to learn how to think about pricing in a way that helps you stand out for the competition and give your customers a reason to choose you.
What Does Pricing Mean in Marketing
Pricing is how you sell your product or service to customers. It is how much money they are willing to trade to get the value that you provide.
Pricing is all about the customer — so if you want to set the right price, you have to BE your customer, think like your customer and be in touch with your customer.
Remember the 4 P’s of marketing? Product, Price, Promotion and Place (Distribution). Think of these four elements and the foundational posts that make for successful marketing.
I like to think of the 4 P’s of marketing like a sound equalizer – where you adjust each lever to create a perfect mix of product, price, promotion and place that provides the highest value to the customer and the highest profit for you.
Stop Being Passive About Pricing
Admit it, you’ve been passive about pricing. You’ve been thinking that the secret to getting more customers is about promoting and getting the word out. But your price is just as important.
How Pricing Works
Pricing is a combination of costs and your customer’s perceived value of your product or service.
Your final selling price communicates your product’s or service’s value just as much (if not more) than any promotion you might do.
It’s much more of a soft, psychological element of your marketing than most people will lead you to believe.
What You Need to Know Before Setting Prices
In the same way that you are much more than your skin, bones and organs, your price is more than a sum of product costs, overhead costs, cost of goods, or variable costs.
When setting a price for your product, you need some information first.
How much it costs you to “make your product or service happen”
This includes fixed and variable costs like utilities, your time, cost of employees, tools, etc.
Alternatives your customers have (competition)
Where else can customers get this product or service or, can they do it themselves.
What is the value of your product or service?
You can call this market research of sorts. This isn’t about how much it costs, it’s about the value that it brings. In fact, it’s about understanding where the real value is for your customer.
Here’s an example:
A business coach makes an offer that costs $1200 per month. It’s a training that helps clients develop a list of buyers and sell them offers.
You might think that the value is training and coaching. But that’s not where the real value is. The value is NOT the content and the training (you can get that anywhere for free).
The value is NOT the coach herself. While she is certainly a celebrity and very successful and very smart and provides value. You are paying for HER and she’s not the real value.
The value of this offer is ACCESS to coaches who have helped tens of thousands of people just like you. They have seen it all, they have transformed impossible offers and ideas into super profitable ones. And you have access to all of them.
How much would that cost? In time, in finding the right coach with the right experience?
Now, where is the priceless value for YOUR customers that they can’t get anywhere else?
How to Know if Your Price is Too Low
How many times have people told you that your price was too low. It’s one thing to be told, it’s another thing to see it for yourself.
Here are a few triggers to pay attention to:
- If you look at your caller ID and roll your eyes and dread answering the phone.
- If you can’t set-it-and-forget-it. This means you have no systems in place and your business is dependent on you.
- Your customers are surprised at how low your price is.
- You are “stuck” with certain clients or customers who drive you crazy and who are always complaining about your price.
How to Avoid Selling Yourself Short
The best way to avoid selling yourself short is to flip your thinking about how pricing works.
Start at the end: How much money do you want?
Instead of starting with a selling price and trying to promote and sell as much product as possible, start with how much money you want in your pocket and start creating your product or service from there.
In technical language, this is called profit margin. In plain English, it’s about how much money you want in your bank account and in your pocket.
What is that number for you?
I know what you’re doing, you’re throwing a number up there like a million dollars. Don’t do that. Your brain knows you’re not serious.
Start with the minimum amount of money that you need to survive.
- Add up your fixed costs.
- Add up your variable costs.
- Include all those expenses that you’ve been ignoring. Not sure what they are? Open a credit card statement.
Create an OFFER instead of selling a product or service.
Don’t just think about your product or service as a singular thing. Think of everything as an offer. An offer is every element of your product or service;
- The actual widget,
- How it’s packaged,
- How it’s delivered,
- The service that comes with it
Here’s a helpful tip: Make a list of everything that goes into your product or service. Then attach a cost to every element that goes into delivering your offer to your customer.
When you see that number, your eyes will be opened.
Add up your customer’s costs
Another forgotten element of setting a selling price is thinking about the cost to your customer.
Make a list of all the costs your customers incur as they try to solve the problem your product or service solves.
- What’s your customer’s time worth?
- How long does it take for them to fix the problem you solve? (assuming they are NOT the expert that you are.)
- What is the cost of materials for your customer? (Assuming they don’t have access to the discounts that you do.)
- What are your customer’s fixed costs?
- What are they missing out on while they are doing poorly what you do well?
Now you’re ready to start thinking about choosing a pricing strategy for your product or service.
How to Choose a Pricing Strategy
Think like your customer
Like everything in marketing, it starts with your target customers. Instead of thinking of your potential customers as a group, focus on a specific individual.
What does value LOOK like to your customer?
How does your customer make pricing decisions? What business goals do your customers have? What do your customers think about your competitors prices?
The only way your customer will trade their money for your product or service is if they perceive that they are getting more in value from your product or service than they got from keeping their money.
How do you want to measure market share?
Market share plays a HUGE role in what pricing strategy you choose. If you’re Apple and you “own” the high-end premium pricing audience who want the latest iPhone, you can afford to charge whatever you want.
But if you’re an unknown mobile device company that wants to take customers away from the iPhone, you may have to compete on price.
Let’s assume that you aren’t as well known as the “big guys” in your industry. Let’s assume that you don’t even NEED the sales volumes that your competitors need.
If that’s the case, you have a lot more flexibility on product pricing.
Types of Pricing Strategies
I believe that every business should START with a cost-plus strategy. Cost-plus pricing means that you add up your total costs for producing a product or service and then add your desired profit level.
There’s no getting around understanding your costs of producing a product or service. And you also want to know how much profit you MUST make in order to stay in business.
No matter what pricing strategy you choose from this point, calculate your cost-plus price because that gives you the baseline from which you can move forward.
Value-based pricing is a pricing strategy where you set your price based on what your customer thinks it’s worth. When you hear people say “What the market will bear” this is value pricing.
For example, an umbrella on a sunny day may cost $3.00 but on a rainy day in New York City, it can sell for $15.00.
The danger with value-based pricing is that your cost-plus price may be HIGHER than what the market is willing to bear. This is why I recommend coming up with a cost-plus price and then a value-based price.
If you’re just starting out in an industry where there are a few established companies, you’ll want to set prices on your competitor’s prices.
Using a competitive pricing strategy can be a great short-cut to guide your future product development.
If you’re first to market or offering a new-to-the-world product or service, you can try a price skimming strategy. That means that you might launch with a premium price to grab early adopters of a product or technology.
Market Penetration Pricing
This is the most dangerous pricing strategy for your business. It’s tempting to undercut the competition with a low price. But if your costs are higher, you will find yourself working yourself out of a business.
The only way you can be successful with an economy pricing model is by having an extremely tight grasp of your costs and your process.
Another pricing strategy that requires an extreme grasp and control of your costs, your processes and cyclical trends is Dynamic Pricing. This model works by constantly changing your prices to match current demand. Airlines use this model by charging different rates based on when you purchase your tickets, for example.
Fun Pricing Tips and Trivia
- Raise prices every year by at least 1%. This teeny, tiny price increase can generate an average of 20% increase in operating profits assuming demand remains the same. (I got this from Rafi Mohammed’s book 1% Windfall)
- Set a “list price” for all your offers. This is the highest price you intend to charge. This way, you can always create discounts any time you want to drop the price.
- NEVER EVER sell the same offer for a lower price. Instead, create a good, better, best option for your offers.
Ready to Price?
There you have it. Now you know that the best way to set prices is to start with understanding your target market, your competition and your costs.
Using these important factors, you’re ready to create some offers, price them for value and start making money!