One topic that has been regularly asked on BYDC concerns how to properly set your prices.
Now, while this might not be the sexiest topic ever, it is certainly one of the most important ones for your business, as it directly impacts your revenues.
And, let’s face it, I haven’t yet met one single person that has a clear and simple way to setting prices. I believe this happens because of some usual mistakes that we all do when calculating our pricing – like benchmarking with competitors -, and I also don’t believe the microeconomics models that we learn on the university to evaluate pricing elasticity of the demand can be considered “practical”.
So, in this article we will dive in what I found to be the best and simplest way to understanding where you want to position your product – in terms of pricing -, with a really basic and executable methodology that is formulated from what the market tells you, and doesn’t rely on your competitors’ pricing and offers.
Also, in the end, I’ll share with you two stories to underline the importance of psychology and the importance of researching your industry very well, when setting prices.
INTRODUCING THE “PRICE MAPPING” METHODOLOGY
Once upon a time, I saw an online video that taught me an amazingly simple methodology to properly define pricing – which unfortunately I cannot credit because I’ve forgotten the name of the author (if you know him, please let me know).
In spite of being something remarkably simple, it is still quite effective. I’ll definitely be using this technique in every new product that I launch.
Here, we won’t throw numbers up in the air, and we surely won’t calculate prices based on competitors. In fact, we will ignore COMPLETELY what our competitors are doing, at least for now.
The 4 Key Questions
The Price Mapping will be created according to some critical questions that you MUST ask to your target market before you launch the product.
You’ll be asking a set of 4 questions, with a specific order. My humble advice is that you never forget these questions. These are:
#1: What’s the price that you consider absolutely fair for this product?
#2: From which price point do you believe this product is too cheap to be credible?
#3: From which price point do you believe this product is getting expensive?
#4: From which price point do you believe this product is too expensive for you to buy?
You have to ask all the 4 questions to each person and in this specific order. The survey can be made in-person or online, as long as you make sure the customer is able to perfectly understand the product you’re talking about.
Also, the order matters because you want the customer to start with the fair price, so you don’t anchor their opinion closer to the cheaper price point or to the most expensive price point.
Notice that we aren’t showing any price references to the customer. Nope. If you present the customer with price options, you’ll be, once again, anchoring him in that specific set of prices, which might not represent his true opinion.
You see, prices are relative. For me, 5€ can be cheap, while it can be a bargain for you. So, you want to understand what’s the customer genuine gut-feeling instead of skewing his response.
And, to be honest, a lot of people enjoy giving their opinion about pricing, that’s the reason why “The Price is Right” is such a famous TV show all over the world. It shouldn’t be that hard to receive a good amount of participations.
Anyway, if you have any trouble reaching out to your target market, I’d recommend you to consider these options:
- Write the 4 questions in a small message and send it to everyone you believe belongs in the target market. Now, you don’t want to send it in a cold email format, you want to make sure you write a small introduction – no more than 1 or 2 sentences – and then ask for their opinion in a friendly manner. Mention that their thoughts are really invaluable! Remember that we all crave for importance.
- Ask some of your best friends to reach out to as many people as possible through social media, namely Facebook. When you multiply your reach 2, 3 or 4 times, you’ll easily increase the level of participation to a few hundred. Make sure you explain very well to your friends which are the traits the persons must have to belong to the target market.
- Create a quick form in typeform.com or surveymonkey.com, and place the link in forums that are frequently used by your target market. Do not spam and do not be annoying. One thing you can do is to create a Reddit thread in the right sub-Reddit and ask people to give their “IMPORTANT” opinion about the price of a certain product.
You can be highly creative here, there’s no need to ask one person at a time in the streets, that will be highly time-consuming – even though you can have a higher degree of certainty that the person you’re interviewing belongs to your target.
So, does it make sense so far?
Afterward, you’ll create a really simple map with the average values people give you. Specifically, you should be aiming at understanding what around 80% of people think about each one of the four questions.
Then, your goal is to have a map like this.
In the example above, we’re analyzing the replies for a SaaS monthly fee – a company that sells a specific software application and charges a recurring fee every month. The values illustrated are not important, the principle beneath them is what matters.
Through this map, you can easily understand the 4 big dimensions of pricing, right?
1.Too cheap to be credible
From 40€ to any lower price, your product will be so cheap, that you’ll struggle to sell it because the target market believes the product is not credible. And this is really important, you see? We’re used to believing that cheap is always better, but that’s not the way our minds work.
In order to sell below 40€, you can bet that you’ll have to invest a considerable amount of cash in marketing and, most of all, in the right advertisement. Here, you’ll be aiming at changing beliefs, which is truly hard to accomplish. It will feel like climbing a mountain with a giant rock on your back. And besides, you cannot invest forever, so you’ll have to “hope” that your marketing efforts change the consumers’ mind before you run out of money.
2.The Fair Price
In this price point, you’ll find what is considered to be the standard price. This means that if you position your product within this range, it will inevitably be seen as a regular product, with no differentiation whatsoever at a first glimpse.
Now, you can decide to position your price in this range for multiple reasons. After all, the large majority of the products will be positioned around these values. But you have to think whether you want to fight fire with fire or look for ways to differentiate your offer, knowing that the mass market will always be in this price point.
Here is where the premium section begins. These prices are almost too expensive but there’s a considerable part of the market that still has money to purchase them. However, they will now demand a high quality from your product in return. Expectations are getting higher, and you cannot let them down.
Finally, the fourth dimension: the product is too expensive from the 80€ and above. This means that the vast majority of the market will never buy this product. Here, you can be sure that to have a business, you’ll definitely have to show a remarkable, highly unique, and differentiated product. You’ll have fewer customers, but those will be the ones who can afford the best products and are happy to pay for top quality.
Now, why is this mapping so important?
Why will this radically change the way you set prices?
Well, because now you can understand and VISUALIZE how your target market values products according to their price.
And you can do it without even looking to your competitors!
You now have access to an extremely powerful piece of information: the prices that you can practice in order to position and ANCHOR the value perceived of your product.
And this is so damn important that I cannot stress it enough.
If you choose a 50€ price, you know your product will be perceived as an average quality product. You know it! And you even know that this price point will have the large majority of the competitors because it represents the mass market.
There’s nothing you can do to change this perception immediately. It will take time and a lot of resources to change the way your customers perceive the value of this industry’s products.
What are the strategic questions that you must ask yourself when positioning your offer?
As you might imagine, having the Pricing Map in front of you won’t by itself tell you where to position your product, right?
There are some internal and strategic questions that you must first ask, and the answers will tell you exactly the price point you want to be in.
#1: Do we have a unique product? How does our product differentiate from the average?
#2: What does the target market think of our product? – besides our own opinion.
#3: If our product’s pretty standard, how can we differentiate it? Is it even possible?
#4: Do we have ways to reach out to the customers from our price range?
#5: What resources will we need to invest to achieve a specific set of customers?
In other words, what we’re trying to understand here is, first of all, if your product is unique or not, and, if not, how can it become unique.
Secondly, it is crucial to understand that our opinion is not relevant when compared to our customer’s opinion. So, ask them what they think of your product.
We’re also trying to understand if you have the resources to access the customers you want to win because sometimes it’s simply impossible to achieve the top-notch customers or to be the cheaper if you don’t have the necessary scale.
And finally, do you have the internal resources needed (whether it is the right know-how, patents, capital, etc.) to explore a specific set of customers?
You need to provide an answer to all these questions in order to have a clear picture of WHERE you can position your product.
STORY 1: Why Apple’s pricing is so damn good
When you look at Apple’s pricing, you might wonder why the hell these ridiculously expensive products have now been bought by more than 600 million people which represent barely 10% of the world population.
The thing is: when you look at the Price Mapping Methodology, Apple’s prices would definitely belong to the Too Expensive category, as I’m sure you agree. Therefore, only a really small percentage of their target market would be able to afford these products. Not many of us are willing to pay €700 for a smartphone or €2000 for a laptop (round numbers).
So, why does their business work so well? Why, all from a sudden, you see everyone with an iPhone when you’re entering the metro station, and ¾ of people in a coffee shop own a MacBook?
I believe this is the consequence of our tendency, as human beings, to following the masses.
Yes, I’m sure you’re thinking “oh really, what a great news…”, but hold your horses. 😉
If you read Simon Sinek’s book “Start With Why”, you’ll understand that after your product is purchased by more than 18% of your target market – we’re talking about the early adopters –, the rest of the market will feel highly tempted to follow this 18%.
How fascinating, right? So, if you decided that your product can be bought by 100 people, from the moment you sell it to 18 customers, these early adopters will share their experience and will influence the remaining 82 to believe they also need to buy your product.
Now, obviously, you will never sell to the 100 guys because your competition is also part of the equation. But this psychological phenomenon is quite interesting for you to realize you don’t need to think about reaching out to the 100 customers.
All you need is to create a product and develop the necessary marketing efforts that focus ENTIRELY on achieving those first 18 customers. Oh yes! 18 instead of 100! And all the others will follow.
This is also the reason why having focus is absolutely crucial.
STORY 2: Beware of industry context that blocks your way to the right customers
I once interviewed a startup that wanted to create a social media platform to aggregate all the public events, from sports, to music events, to dance, theaters, cinema, you name it. And this platform would also allow you to buy the tickets.
Which is fine, right? The problem was they wanted to sell tickets for the big music gigs – ex: Radiohead, Metallica, Beyoncé, etc. -, as they understood that 80% of the revenue from the events industry would eventually come from these huge bands.
Also, they’ve built all their financial model and growth estimations according to the assumption that they could sell this type of tickets. They would win a commission percentage, and everyone was happy.
However, what they didn’t know is that in every country the big bands’ tickets are all sold by ticketing monopolies with whom the event’s organizers have agreements. And, sometimes, these agreements are in place for more than 20 years. It is simply part of the business; you cannot change it.
So, if you want to reach out the segment that purchases the high-end tickets – which represent 80% of the overall industry revenues -, you would need to bring the music groups by yourself! And that’s a totally different business, right? One thing is building an online platform to sell tickets, another thing is establishing relationships with the greatest bands on earth and whoever also owns their rights, so you can be the one bringing them to your country and benefit from the tickets sales.
Now, I know this is not so much related to pricing. But I wanted to share this story with you so you have a clear picture that sometimes there are variables you cannot control in a given industry. Whether you’re pricing a product, developing a technology or designing the business model, you’ll want to have this in consideration.
Make sure you research and understand the industry in-depth before you spend months creating a product.
Alright, and there you go, I hope you enjoyed learning the Ultimate Methodology to Setting Prices and that it was insightful to you. But most of all, I hope you use it for the rest of your life every time you’re thinking about pricing.
Thanks for reading.