Let’s talk price…
There are a ton of decisions to be made around pricing a product or service. And if you’re like most people in business, you’ll make all of those decisions on gut feeling. If you’re like a few really good business people, you’ll then apply some more rigorous testing on the back-end to make sure your gut was right. (Which is good, because our gut feeling is often wrong.)
I’ll give you 7 things to consider below in making that gut decision. Then I’ll give you a +1 thing to consider, which is how to approach testing price.
And here’s why this is important. I once worked with a client that had made a pretty good gut decision on price. And he was selling his product for about $2,400. But then a few months later, I challenged him on whether or not that was still the right price. He tested a higher price — about $3,000. He doubled his per-unit profits, and that put an extra half-million dollars into his pocket that he wouldn’t have had otherwise.
Price can make a huge difference. In sales volume. In profits per sale. In customer value.
Sometimes changing the price (and nothing else) can make a product profitable that wasn’t, or completely transform the entire success picture of a business.
With that said, let’s into our price considerations…
Price consideration #1: Price for volume…
One of the first gut reactions most people have about price is to go low. They see the success of Walmart, Amazon.com, and others that compete on low prices. And they think if they want to compete, they have to price low.
The same thing happens with selling services. People assume they need to price low for the client to feel like they’re getting good value.
These are bad reasons to price low. However, in some cases it’s strategically smart to price low.
Low prices generally create higher volume. And higher volume is good in one of two situations. First, if you are trying to build a really big business that can survive on low margins (such as Amazon and Walmart). Or second, if you are using low-price, high-volume offers to get new customers in the door, knowing some will buy your higher-priced offers later.
I’m not a fan of the first approach. I don’t think most entrepreneurs and marketers understand what it takes to create an Amazon.com or Walmart.
However, the second approach is really useful. It shows up in things like “tripwire” or “welcome mat” offers in online sales funnels. The free book when you pay shipping is a great example of this. Low-priced newsletters are common entry points for the financial publishers I often work with. This works well when you have somewhere for the customer to go after they’ve bought the first item. And when the first item is a very scalable offer you can easily use to get a lot of people in the front door (I wouldn’t use it for consulting or most services, for example).
Price consideration #2: Price for profits…
On the other side of this equation is choosing high prices. I think most businesses charge too little, and you’d be surprised by how much your prospects are willing to pay for your products or services.
That isn’t to say you should gouge customers. However, if you present a clear value proposition that weights the value heavily in your customers’ favor, you may be surprised by how much cash they’re willing to fork over to get in on that deal. As long as everyone is happy in the end, who are we to say that they should pay the lower price?
With this in mind, consider this scenario.
An offer costs you $100 to fulfill. It costs you $50 to sell. And you’re currently selling it for $200. (I like easy math.) So, to sell and fulfill this offer, it costs you $150, revenue is $200, and you get $50 profits.
Now, let’s say you take that same offer, and increase the price to $300. Now let’s say for the sake of argument, that your selling cost doubles — it now costs you $100 to sell it. Suddenly, your total cost to sell and fulfill is $200, but your revenue is now $300 so your profit is double what it was before, $100 per order.
The reality though is that you may find it costs the same or even less to sell your offer at $300 instead of $200 (price can work in funny ways when it comes to influencing the buying decision). So you may find that there’s an extra $75, $100, or even $125 profit in increasing your prices by $100.
This is especially relevant when it comes to selling to previous customers. Once you’ve established a relationship with a customer, proven your value, and they know, like, and trust you, they’re often willing to spend a whole lot more. And so a low-priced entry point followed by a high-priced, profit-heavy offer can both maximize volume and profits in a business.
Price consideration #3: Be a price simplifier…
Let’s go back to low prices. But let’s add a layer of context to it.
Richard Koch, author of The 80/20 Principle, recently released a book called Simplify: How The Best Businesses in the World Succeed. My friend Perry Marshall wrote the foreword. This is a book that will change the way you think about business, in the same way The 80/20 Principle does.
In the book, Koch argues that in order to build one of the best businesses in the world, you have to be a simplifier. And there’s actually two kinds of simplifiers.
The first is a price simplifier. This is someone who changes an industry by finding a way to bring the same product to market at a much lower cost — 50% less than what the competition charges.
Ford is a classic example. He completely transformed the automotive industry by putting manufacturing on an assembly line. This goes on in all sorts of industries, all the time.
You’re a price simplifier if you find a way to bring the market what they’re buying for more, for less. This often requires adding huge efficiencies into the product production and delivery process.
I mentioned above that most entrepreneurs and marketers don’t really understand how to sustainably offer lower prices. And so they get chewed up and spit out by competitors. Well, the secret is being a price simplifier.
If you can find a way to rework your business to beat the competition on price to the tune of 50% savings or more, and you want to make that your model (knowing what it means), do it.
But there is an alternative.
Price consideration #4: Be a proposition simplifier…
The other approach to simplifying in a market is to simplify the user experience and the amount of effort required to get the desired result.
What does this mean? Well, go exactly 10 years from the day I’m writing this, and you’re still more than 60 days from the launch of the first iPhone. Although there are some competitors in the smart phone space, it’s really a niche market.
Then, on June 29, 2007, Apple released the iPhone.
You got the internet, email, an iPod, a camera, and dozens of other devices and features in your pocket. All in an easy-to-use, very friendly experience.
Maybe you’ve seen the internet meme of the old Radio Shack ad with thousands of dollars of products that are now contained in your smart phone, in your pocket? That’s proposition simplification.
“Done for you” services are also proposition simplification. If I teach you how to write copy via recordings, it’s hard to charge a ton of money for that right now. If I create a long-form sales page for you, my current going rate is $20,000 plus a piece of the action, and I’m currently booked out as far as I care to take on new client work.
Simplifying the user experience and/or the burden of getting the result justifies a very high-priced offer.
Price consideration #5: Package pricing…
If you want to be able to charge more, consider how you can package products in order to increase both value given and revenue received in the transaction.
A simple example. Books. Books are just one way to share a piece of content. The digital or print version of the written word typically justifies a pretty low price. The same content can be sold as an audiobook for a somewhat higher price. And if you were to deliver the same content in a video course with accompanying workbook, it may justify an even higher price.
Now, you can sell each of these separately, or you can cater to the really engaged fan, and bundle them together.
The ebook alone may fetch $7.99. But you could sell the ebook, physical book, and audiobook download together for $17.99. And if you package those with the video course and printable workbook, suddenly a $39.99 offer sounds like a bargain.
In order to get to those numbers, I used a recommendation from Gumroad (a platform for selling digital products) that said a lot of people have success with a 1X, 2.2X, and 5X multiple on different package prices. That is, your core offer is 1X. Find a way to more than double the value of that, and price it at 2.2X. And then, for your most engaged and willing-to-spend fans and customers, offer a 5X price alongside that. These multiples work great as starting points for considering different package pricing.
Also, consider how a recurring billing or subscription package can be integrated. If your product or service involves the ongoing delivery of value, adding a recurring billing offer to the mix is a great way to charge less up front increase total profits per customer.
Price consideration #6: Market perception…
Another factor to consider when it comes to price is what the market is used to seeing similar products priced at.
Take something like a book — and for the purposes of this illustration, we’ll stick to physical books. There’s a clear price range for books. A trade paperback is typically going to cost somewhere around $5. A real high-end paperback will go for maybe $30 or $40. Hardcovers add $10 or so to the prices. Make it collectible and you might get up to $100. Textbooks usually fall into the $50 to $100 range, too.
But there’s a definite upper bound on books. You’re unlikely to have much success with selling a book for $1,000 — no matter how valuable it is to the reader.
Flip that around though and offer the same information in a live seminar format, and you may find people willingly pay $2,000 to $5,000 to attend. The same thinking Jay Abraham put into his $25,000 seminars can now be picked up in his books for under $10.
This is why Dan Kennedy has often said that books make great business cards, but horrible products. When you price your products to sell, you have to consider how the market will perceive price, and make your decision with that in mind.
(And this doesn’t mean you have to match the market perception — this is more of a “know the rules to break them strategically” consideration.)
Price consideration #7: Matching willingness to sell with willingness to pay…
Ultimately, price comes down to one factor.
If I set a price and put it into the marketplace, am I able to cost-effectively get enough people to take me up on my offer that I’m able to meet or exceed my revenue and profit expectations?
If you set up an offer with exorbitant profits built in (to most peoples’ perceptions) but there are enough people happy to pay your price, and everybody’s happy in the end, there’s no problem with that.
On the other hand, if you make a low-priced offer that loses you money every time you make a sale, that’s a bad deal.
Your revenue and profit per sale has to meet your business goals. And your customers have to feel as if they’ve gotten a good deal, too, that they got what they paid for.
This can mean changing your price, changing your market, changing your product, changing your marketing — but when you find that sweet spot, you have found a good price for your offer.
How to test price…
Okay, with all of the gut feeling considerations above, you’re going to land on a price for your product.
Consider that your starting line.
Your finish line is the ideal price for your product or service that meets your business objectives of maximum profits (either through maximum scale or maximum customer value).
The way to move from your starting line to your finish line is to test different prices. See what the market will respond to. It’s really the only way to know what works.
You may find higher prices lead to lower volume — and you figure out where on that spectrum you want to land, based on how many customers you want to deal with, and the scalability of your offer.
Or you may find higher prices actually increase volume — and then you want to see how high you can increase prices before it starts driving volume back down again.
Consider these ideas.
— Add a zero to your price. You may surprise yourself with this one.
— Double your price.
— Find the highest-priced offer in your market, and find a way to go 10% higher.
— Find the lowest-priced offer in your market, and find a way to offer the same thing for 10% to 50% lower.
— Bundle and package products and services to get the 1X, 2.2X, and 5X multiples.
— Offer a subscription, membership, or other recurring continuity offer.
— If you only offer high prices, find a low-priced entry point you can use to get more customers coming through the front door.
— If you only sell for low prices, find a very high-priced offer that will be attractive to very few customers, but which will multiply profits.
Don’t get emotionally attached to a price. Don’t feel like just because someone bought something at a certain price yesterday that you are stuck to that price. If they complain, take care of them like you’d like to be taken care of. But as a business, it’s your right to sell your products for half or double what you sold them at yesterday. Customers who bought at yesterday’s price did so because they thought it was a good deal, and it still was even if your price changes today.
It’s an old rule of direct marketing that your list or target market is 40% of your success, your offer is 40% of your success, and your copy and creative is 20% of your success. To hit 100%, you have to have all of them right — but most people focus mostly on what to say and how to say it.
A tweak to your pricing could be twice as powerful as hiring the world’s best copywriter to write for you, but limit them to the same offer you’ve been using. (The world’s best copywriters add value, in many cases, by tweaking pricing and offer — and this is why.)
If you really want breakthroughs, it pays to pay attention to this stuff.
Yours for bigger breakthroughs,