Pricing your product is one of, if not the most important things you’ll decide in your business.
As I like to say, great businesses are built on great margins. So, price too low, and your margins will be too slim. But, price too high and you won’t be able to make enough sales.
Your costs give you a starting point for what to charge. But here’s the thing: your average customer has no real idea what your costs are. And the less concrete your product (think software, or something service-based), the more nebulous pricing can become.
I see people every day leaving money on the table because they’re afraid to charge too high over their costs. But think about the last time you went shopping: is there anything you’d buy for $3.99 that you wouldn’t buy for $5.99? Or anything for $5.99 that you wouldn’t buy for $8.99? Those $2 or $3 per unit are a massive difference on your balance sheet when you consider the total price of the product.
What you really need to understand when pricing your product is that buying is an emotional decision. No one is going to come knocking at your door to ask for your cost analysis and then decide if you’re charging a fair price. No—they’re going to make an emotional decision and justify to themselves afterwards whether it was a good deal.
Here are a couple pricing models to think about:
Consumer Pricing Bands
For everyday items, I see most consumer purchases falling into a few main mental/emotional pricing bands:
- <$20: thoughtless
- These are small purchases that a significant other would never notice or expect to be included in a conversation about finances. (ex: lunch at a fast-casual restaurant, pack of gum, giving to a homeless person, fancy latte)
- $20–$85: minor consideration
- These are medium size purchases where one might consider it a bit more. Again, you wouldn’t necessarily bother mentioning it to a significant other, but likely wouldn’t spend the money without some thought (before or after). (ex. a small appliance, massage, expensive meal, gift for a close friend).
- >$85: considered
- Considered purchases are those that a significant other would feel upset if you didn’t mention. You might not consult them to actually make the purchase, but you would definitely say something about it after the fact. (ex. expensive piece of clothing or pair of shoes, small piece of furniture, low-cost electronics).
Think about which band your product fits into, and then capture that money on the table and price towards the high end.
On a recent trip to Seattle, I was fortunate to visit the glass artist Dale Chihuly’s studio. There were mock-ups of installations going into museums around the world. As we walked into the office, he showed me each of the pieces in the more affordable line called his Studio Collection
Each year the price goes up on new pieces in the studio collection no matter what. Prices are never discounted and when the last is sold, no more are made.
For purchases outside the everyday bands, your buyer is going to be giving it some thought no matter what. That doesn’t mean it’s any less of an emotional decision, though.
Setting your price and leaving it there helps set market expectations. Offering discounts teaches me as the customer that the price is negotiable. I’m not going to buy it at a higher price, even if I can afford it, because that doesn’t feel
good, and, as we know, I let my emotions drive my buying choices.
And on the flip side, setting a fixed price that’s too low suggests that my product is cheap garbage. People expect to get what they pay for and pay for what they get. Once again, if you have an adequate product, you could easily be leaving money on the table by pricing too low. (Let’s be real: there are very few truly good products in the world, so most people are used to overpaying without realizing it).
All this said, your prices aren’t carved in stone, and you can and should test and tweak fairly often.
Need a starting point? Ask 5 people what they would pay for your service. Take the average (removing any outliers) and be done.
Want to test? Build two landing pages, each having a different price: one cheap beyond belief and one you think is high. See what the conversion is for each. You might be surprised.
Pricing is more of an art than a science. Tap into the emotional core of buying decisions, and use that knowledge to grow your margins.