Do you constantly find yourself asking how much you should charge for your products or services? If you are an early stage startup and do not have a history of customer traction and feedback, pricing becomes a complicated question.
It is important to do some research, do the groundwork and have a pragmatic approach towards pricing.
Pricing is a mix of art and science. That’s why you can’t just look at your costs and add a percentage for your profits and be done.
Understand The Perceived Value
When you think about the brands such as Walmart, McDonald’s, The Keg Steakhouse or Tom Ford and Gucci; what comes to mind is the perceived value of their brands as well as the quality of their products.
It is important to understand the notion of perceived value.
The perceived value is how much value the customer feels your product delivers for the price they pay in comparison to the competition. Consumer perceive your product as valuable if the value they feel is higher than the price. Hence, the bigger the difference, the more valuable your product feels to them. Keywords like the product is definitely “worth” the price or it is a “no-brainer” signal high perceived value.
Often, you can achieve the perceived value by bundling your products or services, upgrading the look or placing them in the same shelves as the other valuable brands.
As Gregory at Help Scout puts it, “the best way to sell a $2,000 watch is to put it right next to a $10,000 watch”. This works with our cognitive bias that makes us rely more heavily on the first piece of information we see to make a decision. Seeing the $10,000 watch gives us a mental value benchmark, which results in the $2,000 watch seeming like a great deal.
Last, what you should be focused on is figuring out what is in the product that the customer feels important and worth the investment they cannot refuse, even at a higher price.
Make Educated Assumptions
As I mentioned earlier, pricing is a mix of art and science. To create a palatable mix, you need to make some assumptions and the more educated these guesses are the more success you have in justifying your prices. Research plays a big part in that.
Start with your target market and understand their buying preferences, their budget and how much they can afford. Then, move on to your competition and understand how much and in which manner they charge their customers.
Most entrepreneurs set their prices based on what competitors charge. Understanding your competitors’ unique differentiators, positioning and targeting gives you a clearer idea of where you want to fit your startup on the market.
By offering more value and positioning your solution as a higher-end product you can charge more. Also, you can match your competitor prices or charge less to undercut the competition and potentially acquire customers faster.
Competing on Price Alone is Dangerous
Another important thing to understand is that your pricing strategy is only part of your overall strategy. It’s dangerous if your price is the only reason prospects choose you. If your sole value proposition is offering a lower price, what do you do when your competitor offers lower prices? If you have nothing else of value to offer, you’ll lose customers. Your only recourse is to reduce your price.
In the second part, I will walk you through different pricing strategies and explain the specific focus behind each strategy.
Stay Tuned! and learn more about how a fractional CFO can support you with your pricing strategies and discovering the best approach for your business model.