How Much Should You Charge?
When marketing a product or service, businesses find it
difficult to set their prices. Too high, and no-one will
buy, too low, everyone will buy, but you will go broke. So
how do you set your prices?
The basic principle of pricing is that you should set your
prices as high as the market will allow. But what does that
mean? (You may not decide to do this for other marketing
reasons such as trying to buy customers, or offering an
introductory price to encourage people to try a new product
or service. But this should be a conscious strategic
decision.)
When setting their prices, the single biggest mistake that
businesses make is not to understand the value they offer
compared with their competitors. So you must understand why
your product is better than everyone else's.
Is it stronger? Does it last longer? Is it better designed?
Does it look better? If it is a service, what are the
superior results you provide? What is the value of such
differences to the buyer?
If it is a commodity, then what else are you offering? For
example, you can get a $2 fruit snack bar at the service
station as you are filling your car. You know you could
probably get the exact same bar for 25% less at the
supermarket, but you will have to make a special stop, and
then you will have to wait in a queue. Its just not worth
the 50 cents you will save. You are prepared to pay 50
cents for the convenience of buying the bar now. But if the
bar was $5, would you buy it? Well you might if you knew
that this service station was the only retail store for 200
miles!
Economists call this decision making "the cost of shoe
leather" which is the amount of effort you are prepared to
make to find a saving on your purchase.
When you understand the value of what you provide compared
with your competitors, and that includes substitutes for
your product or service, you can then better set your
prices.
So if you product lasts twice as long, could you charge
twice as much? Well consider the inconvenience factor of
the replacement. If the item was socks, the inconvenience
factor might be quite low. But if it was a special valve
inside a jet engine, the replacement cost of which was many
times the value of the valve, you could probably charge
considerably more for the valve than twice the cost of a
valve that lasts half as long, particularly if you
guaranteed its lifetime.
So the value of the product has little to do with the cost
of production or service. It is the value of the product to
the buyer. But it is not enough for you to know the value
of the product or service to the buyer. The buyer has to
know as well. But it is surprising how often that a buyer
really doesn't understand the full value of what they may
be buying.
If the buyer does not understand the value of what they are
buying, they won't pay what it is worth. If they don't know
there is not another retail store for 200 miles, they are
unlikely to pay $5 for that snack bar. And the jet engine
manufacturer may not understand the maintenance cost
implications of a lower quality valve to the end user.
When you know what your product is truly worth, and you
have educated the buyer of its value, you will be able to
set prices that reflect that value. The maximum value that
the buyer will bear- before they will decide they are
better off with the lower value product, or the pain.
How do you find this threshold? Trial and error! Start at a
price a little above the inferior product, but below a
superior one, and keep lifting your prices until your sales
conversion factor declines to an unsatisfactory level. If
you can't sell it at a price above an inferior product,
look closely at your marketing and sales process.
But remember, if you don't understand your value, you will
forever be just another commodity seller competing on price.
