How to maximise your profit through price
Setting prices is one of the highest-value decisions your business will ever make. Every extra penny you get on price goes straight to the bottom line, just as every penny you chip off, comes directly out of your profits. So, how should you set, and raise, your prices?
There are just two things you need 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, take a closer look at them.
Alternatives: Customers nearly always have alternatives to your product or service, even if that means buying nothing instead, and the more comparable they think those alternatives are, the more your price will be perceived in terms relative to those others. But that’s not always a bad thing. Price anchoring is a well understood phenomenon – put three differently priced bottles of wine on a menu, and most customers will choose the middle one. Now replace the cheapest with a more expensive option, and guess what? Most people will go for the middle one, even though it’s the exact same bottle that was previously the most expensive. The comparison you present has a huge impact on the choice a customer will make, so think about how can you position your offer as the sensible trade-off between the overpriced and the underwhelming?
Value: Where comparable alternatives don’t exist, where what you’re offering is genuinely different, or where the trust and esteem of your brand sets you a world apart from the rest, then you can forget about the alternatives, and price on purely 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. And don’t be afraid to push the envelope. In one trial we set out to find how much we could charge for a premium coffee in the tourist heart of London. We set five different price points to find out exactly where demand dropped off, but the trial failed - demand didn’t drop off – even our highest price point wasn’t high enough to put customers off, which taught us a valuable lesson in more ways than one. As a rule of thumb, unless 25% of prospective customers are walking away because you’re too expensive, you’re too cheap.
Over the last 20 years there has been a huge amount of research on what behavioural psychologists call “fast thinking”, which shows categorically that we make the overwhelming majority of our daily choices entirely 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 justifying those decisions once we’ve made them, but most of the time we’re working purely on instinct and your pricing structure needs to reflect that. The price a customer is prepared to pay is not based on your costs, nor on some mathematical assessment of features and benefits, it’s based purely on a combination of perception and expectation. If you want to price for profit, you need to pull those two levers first.
So, the next time you find yourself asking the question “what price should we be charging for this?” stop right there, and ask: 1) How can you dramatically increase the customer’s perception of the value they’re going to get, and 2) How can you invite comparisons that raise the customer’s expectations of what it should cost?
Once you’ve answered those two questions, then you can set your price.