Learning how to price offers is one of the most challenging skills that an entrepreneur has to learn on her journey. As much as you might want a quick how-to to walk you through exactly how to price something, I’ll be up front: there is no one-size-fits-all list that will tell you the exact price to put on something. Pricing is both an art and a science that way.
I’ve learned a lot about pricing products and services over the last six months. The truth of it is that, though I had a good bit of knowledge about how the market worked, I didn’t have a lot of understanding about it.
As you may remember, I’ve mentioned that one of the biggest things that I hate about entrepreneurship is pricing stuff. After I produced that video, I got serious about getting to the bottom of it; being a coach, I couldn’t afford to let it be something that I wasn’t comfortable with.
It’s still not easy now, but at least I have a much better framework for thinking about how to go about pricing something. I’ll share a little bit of that framework with you today.
Throughout this series, “product” includes products, services, events, or any type of offer you’re putting out there – this just makes it easier to write and read. So, if you’re a service provider, speaker, or workshop host, just understand that I’m talking to you, too.
There are three basic and interrelated considerations that you need to think about when it comes to price your product:
These three considerations are what I’m calling the 3Ps of pricing. Let’s look at each in turn.
Write this down and think about it: there is no absolute correlation between price and value.
Value is inherently subjective, and, as such, you can’t price something so that it has a certain amount of value for everyone. For instance, let’s say you create a product that helps people save 4 hours on a specified task. How much is 4 hours worth?
If you tried to answer that question, you fell for the same trap that catches many of us. The only way you can answer that question is to contextualize the question to a specific person or specific demographic. If your ideal customers are designers who charge at least $75 dollars per hour and your product focuses on billable hours, then those four hours are worth $300 to them.
Even though they would have a net gain of $300 time-dollars from using your product, you might not be able to price your product at $300. Some of that relates to the other Ps we’ll discuss, but you have to consider how your price relates to their perceived value. If your price is much higher than what they think your benefits are worth, they’ll think your product is overpriced and probably won’t buy it.
We’re all familiar with overpricing products, but the real lesson I had to learn was around the perils of underpricing products. I’ll talk about that specifically in its own post using Email Triage as a case study, but you have to consider that if you price your product too low, your ideal customers might not buy it because they’re translating price to value and come to the conclusion that your low-priced product is also low-value.
Your challenge, then, is to come up with a price that considers the too-low range and the too-high range and falls into the green middle. Novice entrepreneurs normally have a decent gauge when it comes to overpricing because they’re scared of overpricing anyway, but it’s that lower edge that you’ll have to watch out for, too. If you end up in the red zones of the picture above, you’re going to have a hard time selling your product.
Working Hard For Your Money – Even If It’s A Little Bit
The counter-intuitive truth about underpricing a product is that you’ll have to work just as hard to sell an underpriced product as you will one that’s slightly overpriced. The reason for this is because you’ll have to actively work to get the price to not alter the perceived value of the product so that it falls below the threshold where your ideal customers won’t buy it.
So, yes, the higher the price of the product, the harder you’ll have to work to sell it (usually). But it doesn’t hold that the lower the price of the product, the easier it’ll be to sell – at a certain point, your ideal customers just won’t buy it because of how they perceive the value of the product.
People don’t buy products because of the actual value of the products — they buy stuff because the price of the product closely matches their perceived value of the product. (This is where positioning come in.)
Keep in mind that Perception is one of the pre-purchase considerations when it comes to pricing, meaning that it’s what’s going on in peoples’ heads before they buy your product. However, their perceptions about the value of the product has a strong influence on how they’ll use the product, so altering the price of the product can sometimes alter the value they actually get from the product.
This is a nice segue, so in the next part of the series, I’ll discuss Placebo – the post-purchase consideration that affects how you should price your product. Stay tuned!
I’d love to hear your thoughts on this post. Was this helpful? Did it scratch an itch you’ve been having?
P.S. Want to know more on pricing for your next launch? Check out the Epic Launch Class.
Looking for more info? Check out The 3Ps of Pricing: Placebo (Part 2) and The 3Ps of Pricing: Positioning(Part 3).
This is really helpful Charlie and 2 things stand out for me:
1) The insight that I’ll have to work just as hard to sell an under-priced product went “boing!” when I heard it. I hadn’t considered that and its a major incentive to keep me out of the bottom red zone and in the green with my next offering.
2) The idea that I create a perception of the product value for my customer that DETERMINES how they USE the product is a big wow for me! Of course, now it’s totally obvious to me that this has determined my own use of every online product I ever bought!
And I want them to use every last bit of MY product and milk it for everything it’s worth and I know that’s determined by their level of engagement with it post-purchase. But the idea that I set up the conditions for that engagement in the sales process is something I really want to give a lot of thought to now and set up very, very well during the launch phase.
Can’t wait for the next installment!
kim bauer says
Your artical came at a great time for me, the prices I have now need to be changed and this gives me more of a direction to use, very well written, thanks!
Victoria Rickert says
I sell collectables and vintage mostly so I research what other similiar items are priced. I also do an extensive search of the web if the item has a label or some sort of marking. I know I have underpriced some collectables, but I am just starting out and what I am finding out is that I get a sense of fair pricing. Like you said it is subjectable. Now shipping prices, I am hoping to get a handle on that too! Thanks
Sid Savara says
Great read, and something that I’m learning more and more about – the way to market, position and price products. Totally new to me, but an area I need to educate myself about before I start making premium products available to my readers =)
I’ve been reading a lot about price lately, and some interesting psychology studies that show the same thing: that people will perceive something to be more valuable the more they pay for it. As I started thinking about it, I realized I fall into this same trap as well – when I was at the store recently, I was comparing a couple of surge protectors. One of them was slightly more money, and so I assumed it was better: until I looked closer and saw the specs were actually worse than the one next to it (but it was pricier primarily because of cool color coded and child safe plugs).
I’m no expert on surge protectors anymore than I am on pricing products – and that’s likely why upon first glance, I used the price as a gauge of quality/value
Briana Kumpe says
Oh, so helpful!
I’m sitting next to my businessman-dad, quoting your article. He’s been nodding his head, “yes, yes and yes”! I thought that this was particularly helpful:
“The counter-intuitive truth about underpricing a product is that you’ll have to work just as hard to sell an underpriced product as you will one that’s slightly overpriced.”
Really helpful. Looking forward to your next post.
Ali Hale says
This is helpful, Charlie, and thank you. I’ve come across some of the ideas before (through reading, and through experience!) and I agree that under-pricing a product is dangerous.
I do find it a little troublesome when marketers attempt the “You get paid $75/hour, it saves you 4 hours, so it’s worth $300.” To me, that implies that the product/service is going to do all the work on its own… whereas in reality, I generally need to spend considerably more than 4 hours on reading and implementing it, and so on.
When I’m pricing products, I ask myself what I’d be willing to pay (which gives me a maximum sort of range), and what I’d feel *good* about charging. I try to pitch prices at a point where people will feel that they’ve got really good value or a bargain. If a few folks (but not too many) think I’ve undercharged, that probably means I’ve hit the right point.
I also try to look at what I would be willing to pay and what I am comfortable with charging. One lady asked me the other day, only $55?!? That makes me happy and yes, I am still comfortable with charging only $55.
It’s always good when customers are remark that your prices are lower than they expected. Of course, given the negativity bias, it’s also hard to remember those who’ll say that when the others who’ll say they’re too high come up.
Jennifer Moore says
This comes into my pricing strategy, too. I ask myself what I would pay for it, and I balance that with charging a reasonable rate for my time and with charging for materials used.
I think I’m getting to the point where I’m in the ballpark now.
Vintage/antiques are a whole other ball game. I research what it’s selling for elsewhere, and I adjust up or down, depending on features, damage/flaws, completeness (are all pieces/pages there,) etc.
Willie Hewes says
Pricing is very difficult. I’ll look forward to the next installments.
I undercharge. It’s a habit that’s hard to get out of. Maybe I should aim for the other red zone, so I’ll end up somewhere in the middle.
Like Ali, I get suspicious when marketers try to calculate for me how much time/money I’ll save or make with their product. That’s all well and good, but they don’t know how *I* work or how much of it I can use, or… whatever.
I use a little trick when reading long form sales letters. I ask myself what I think the price is going to be, and how much it will be worth for me *before* scrolling to the end to see what they’re charging. Makes the decision to buy or not much easier, and more trustworthy.
Ali Hale says
That is an awesome trick. I just tend to scroll to the end to find out the price, then I read the letter if I’m still interested. But I suspect that setting my own price point would be more effective.
And yes, you undercharge! Dude! To me, the stuff you do looks like *magic*. I know you’re upping your prices on those cute little mascots, and damn right! x
This is good to know. I also am interested to know if there is some sort of calculations you can do to make the pricing right. I make and sell strawberry jam and I’m wondering how much of a percentage of profit is good? Like how much I invested in materials and then do you multiply that by a certain percentage to get your selling price?
Thanks so much for your help!
Jennifer Moore says
If you are growing your own berries, I imagine you’d want to factor that in, too droughts/flooding will affect your prices from that angle, as will whether you use organic growing methods or not.
Just a thought.
As for adding a percentage (I think what you are talking about is a markup,) I usually calculate my price and then mark the item up 50-100%. It depends on the item, and I do NOT mark up vintage/antiques.
This helped. I’ve been thinking about margins and the fact that maybe that would just make pricing easier. Perhaps to identify my target margins and play around with pricing the jewelry I make according to margins and colliding a decent margin with a realistic/reasonable price for the customer. Looking forward to the next installments!
The pricing of physical goods is tricky, especially when there’s some assembly. It combines the hard costs of cost of goods, shipping, and shelf advertising with soft costs of time involved. It’s harder to get to a reasonable profit point, too, especially because the goods being made in Asia create a downward trend.
I think the post on Positioning will help, too. Thanks for letting me know you liked this one.
Jennifer Moore says
Charlie, this was a great article, and I’m also looking forward to reading the rest of the series.
Pricing is a huge, huge challenge.