One of the questions I’m most often asked by clients is: “what price should we be charging for this?”
It’s a big question and getting it wrong can be costly.
In practice, there are only two things to consider: what value do customers see in what you’re offering, and what alternatives would they consider?
Both are things you can influence, so before you decide on pricing, there are a couple of other questions you might want to ask.
Alternatives: Like it or not, customers nearly always have alternatives to your product or service, which inevitably affects their price expectation. But that’s not always a bad thing, especially when some of the obvious alternatives are more expensive than you. Avoid comparisons with lower priced options - it simply highlights them as viable alternatives. Instead, position yourself against the more premium alternatives, and make sure it’s incredibly easy for the customer to see why your proposition isn’t just cheaper, but noticeably better.
Value: Where alternatives are few and far between, where you’ve genuinely differentiated what you’re offering through doing something really innovative, highly customised or truly unique, then you can step away from the competition and price on Value. Forget what it costs you, forget what others might charge, and focus on what it’s worth to the customer – what it gives them, and what it allows them to do. Don’t be afraid to push the envelope. Unless 25% of prospective customers are walking away because you’re too expensive, you’re too cheap.
Research on human behaviour continues to underline the fact that we make our choices largely on gut-feel, often in direct contradiction to what logic would recommend. We’re great at explaining the way we’d like to think we make decisions, and at post-rationalising those decisions once we’ve made them, but the majority of the time we’re working on instinct. The price a customer is prepared to pay is based on a combination of their perception and their expectation. Not on your costs, and not on a mathematical assessment of features and benefits.
Bottom Line: If you find yourself asking the question “what price should we be charging for this?” stop right there, and ask these two questions first: 1) How can you dramatically increase the customer’s perception of the value they’re going to get, and 2) How can you position yourself, relative to the alternatives, so that you raise the customer’s expectations of what it should cost? Once you’ve answered those two questions, then you can set your price.