Surely your price is too high, too low or simply does not communicate adequate value. Pricing truths and myths.
I have been creating and launching products and startups for over 20 years. In this time I have become an expert in pricing, mainly thanks to the experience I have gained recovering from my own mistakes.
Many startups don’t think much about pricing before launching a new product on the market. They make a lot of guesses, and to be fair, a lot of pricing is guesswork – it’s a mix of math, science, and psychology. There is rarely a right answer beyond “sell it for more than it costs to make it,” but even that rigid rule becomes flexible when market share is a critical factor in the early days.
- Pricing is a mix of mathematics, science and psychology.
- Lowering a price won’t necessarily save you a customer.
- Raising the price won’t necessarily save you a customer.
- Customers think more about the value of a product than its price.
And while we’re at it, let’s talk about inflation for a moment, because I know you’re probably as sick of this topic as I am. Macroeconomic market effects, such as inflation, can influence pricing in an overlapping way. Even when your own costs are not under inflationary pressure, the suppliers of the products you need for your business may be under inflationary pressure. The effects are transitory, but almost always temporary. Unless accompanied by some rare global catalyst, inflation appears, peaks, and recedes over time.
As inflation remains persistent, I ask myself two questions that sound similar but are very different:
- Is our product priced too high?
- Is our product priced too low?
Let’s admit it. Anyone who has ever been in the position of selling something has asked themselves one of those two questions at one time or another. That mix of mathematics, science and psychology makes those questions so persistent and difficult to answer.
As the global economy continues to be dragged down by rising prices and costs, I hear more and more companies asking whether they should meet their market where it is financially: with liquidity constraints and cutbacks. No one wants to be the product or service that a customer decides they can live without, especially if your product or service is considered too expensive.
But here’s the thing. I rarely see a price reduction save a customer or even increase their lifetime value to the company. That’s because those types of hold-or-quit decisions aren’t typically made based on price. What I have discovered is that unless it is the most extreme circumstances, for example an emergency that requires a client to make profound and painful changes to their lifestyle or business, the decision to buy or keep a product or service is reduced to value.
A discount will never save a customer if the overall value of the product decreases to almost zero. Discounting a product or service can work, but only when it is temporary and self-selective, like a coupon. Cost-sensitive customers may use that coupon to sweeten the value proposition in difficult times, while more value-sensitive customers will ignore the coupon entirely and therefore will not perceive that the value has decreased.
In this case, mathematics is not as important as psychology. In other words, the customer will buy or continue paying for the product or service as long as they continue to perceive the value they expect for that price.
On the one hand, think about the times you’re most often offered a price cut as leverage to stick with a product: analog cable and satellite TV, satellite radio subscriptions, warranties, things like that. The retail price does not usually compensate for the decrease in the value of the product, not because of an economic change on the part of the customer, but because there are new options that change the value proposition.
So of course you’ll stay if they give you a 50% or 75% discount, but only for a while. That discount will never save that customer if the overall value of the product itself decreases to almost zero.
On the other hand, I am a fan of discounting a product or service, but only when the discount is temporary and self-selective, like a coupon. Cost-sensitive customers might use that coupon to sweeten the value proposition in difficult times, while more value-sensitive customers will completely ignore the coupon and therefore will not perceive that the value has decreased.
If it’s rare to see a price drop save a customer, it’s almost as rare to see a price increase lose them, especially the type of customer worth keeping.
My answer to this question is almost always “yes”, sometimes even without thinking about it, based solely on my experience that most startups tend to undervalue their product, and there is that psychological problem again.
As a psychological matter, it’s actually not a terrible problem, as it’s a question that usually goes hand in hand with high demand and crunchy business. It only becomes a problem when the math goes awry, when margins shrink with high volume, or when something like inflation drives up delivery costs.
The real issue is again value. If you get signals that your customers value your product more than you charge for it, pay attention to those signals. You can adjust the price to meet that demand, but keep in mind that your customers will always expect more value than they are paying for. Raise the price a little, satisfy that psychological expectation of value, but not enough that the customer considers you too expensive.
Other problems with pricing have little to do with the numbers themselves, for example using the wrong pricing model or pricing tiers incorrectly. I’ll talk about this another time, because before addressing these issues, you need to relate price to perceived value and weigh it against costs to get the best margin.
Once this is done, the rest is pure mathematics.
