What Should You Be Charging For Your Product/Service?
Setting price on your products or services is one of the weightiest decisions you’ll make in your business. It will touch every part of your business from the financials to how you are perceived in the marketplace.
Yet often scant attention is paid to the psychology and marketing potential of price.
More often than not, business owners set price based on what their competitors charge. A common application of this is setting price slightly lower than the market leader in their industry.
Another common way that price is set, is to just take cost price and add what feels like an acceptable margin.
Both of these are acceptable starting points, however, if you aren’t thinking about the marketing or the psychological implications of price then you are likely leaving huge sums of money on the table.
TOO MANY OPTIONS OR TOO FEW?
Regardless of industry, most products or services offer multiple flavors or variants of the primary offering.
Henry Ford famously offered his customers the Model T “in any color that he wants so long as it is black”.
While it may seem backward by today’s expectations of infinite choice and expressions of individuality through ever-increasing personalization, the great industrialist does bring up an issue that is relevant to all entrepreneurs. How much choice should we offer?
Conventional wisdom would have you believe that the more choice you offer, the more sales you will make. However, this has been proven totally false time and time again. There is a famous study by a professor of business at Columbia University that illustrates this point well.
In a California gourmet market, Professor Iyengar and her research assistants set up a booth of samples of jam. Every few hours, they switched between a selection of 24 flavors of jam to only 6 flavors. On average, customers tasted two jam flavors, regardless of the size of the assortment.
Here’s the interesting part. Sixty percent of customers were drawn to the large assortment, while only 40 percent stopped by the small one. But 30 percent of the people who had sampled from the small assortment decided to buy, while only 3 percent of those confronted with the flavors purchased a jar.
The conclusion? Offering too much choice can actually prevent sales. The psychology behind this finding is that people get caught like a deer in the headlights. Fear of making a suboptimal choice prevents them from making any choice at all.
THE “STANDARD” / “PREMIUM” STRATEGY
If you look at Apple and their wildly successful products, you’ll see they are usually offered in only two or three variations each.
This seems to be the happy medium between too few options and the brain overload that is caused by too many options.
Along these lines, a pricing strategy that I’ve seen work very well is offering a “standard” and “premium” variation of a service or product.
The “premium” version is priced at about 50% above the “standard” but offers twice or more value than the “standard” variation.
When using this strategy it’s important to make sure that you are genuinely offering much more value with the “premium” than you are with the “standard”.
This strategy works extremely well in cases where the incremental cost of delivering the “premium” is relatively low because the price differential ends up as pure profit on your bottom line.
THE UNLIMITED STRATEGY
Most people are extremely risk-averse. They fear being stung by unexpected charges whether this is related to data usage, medical costs or consulting fees.
If you can remove this risk for them, you greatly increase the opportunity for a sale. An