Pricing your products is one of the most important questions that many business owners overlook. They either throw up arbitrary numbers based on how much profit they want to make, or worse, look at their competitors and try to undercut everyone with cheaper prices. In this article we look into why that is a horrible strategy, and what’s the right way to price your products or services.
In Tim Ferriss’s book Tools of Titans, in an interview with venture capitalist, Marc Andreessen, he asks:
“If you could have a billboard anywhere, what would it say?”
The answer? Raise prices.
He goes on to elaborate:
“The number-one theme that companies have when they really struggle is they are not charging enough for their products,” he said. “They don’t charge enough for their products to be able to afford the sales and marketing required to actually get anybody to buy it. Is your product any good if people won’t pay more for it?”
And there’s a truth in that. Especially in the ecommerce space. Many people enter the space after watching some YouTube guru’s videos about this amazing new way to make money.
Shopify store. AliExpress. And Facebook ads. That’s all you need.
But is that true? Is starting a thriving business really that easy?
The answer is yes and no. We’ve seen entrepreneurs with no marketing experience, watch a few free videos, and turn that knowledge into a six-figure per month store.
How did they do it? Well, that’s a topic for another article. One thing’s for certain, however…
Pricing plays a huge part in making a profitable store. And there are 2 very important aspects to consider when deciding on a price, both of which will be covered in detail.
They are, how much do you want to get paid? And, how much is your market willing to pay?
And the answer to pricing is towing the delicate balance between the two.
Think of it as a balancing scale, how much you want to get paid must be perfectly balanced with how much your market is willing to pay you.
And if you don’t find this balance, it’s a slippery slope down to a failed business.
Because the cost of starting and running a business is not cheap. The more you grow, the more you need to make to offset the cost with a profit or it wouldn’t make sense to keep going.
So let’s jump into the first part…
How Much Do You Want To Get Paid?
This is the side of the coin that almost all business owners think about.
Say, they can get a product for X price. They factor in fixed costs and variable costs and then come up with a price that is a multiple of X (say, 5X).
That’s the easy part. But as you may already know, it isn’t that simple.
Because the variable cost and volume sold isn’t something that’s easy to predict.
And what about the cost that comes from other products that aren’t moving as fast?
All in all, many business cannot sustain because they are bleeding out every month from channels that they don’t see.
Things like web domain and hosting, apps and software, employees, utility bills, marketing, incurred debt, paying interest, and free cash flow for growth.
And when everyone else is paid, how much is left for you?
If the answer is not much, then you may want to increase prices.
But many business owners are afraid of doing that. They think that if they raise prices, that their customers will go elsewhere.
And that’s true to some extent. We’ll talk about price sensitivity later on.
Right now, think about it for a second. For most ecommerce business owners, playing the price game is a losing battle.
There’s no way you can beat the giants like Wish, Amazon, and AliExpress.
Heck, most of the time, the items are sourced from these sites themselves.
And the moment you’re in that game, there’s no way to win the price war.
So, when everyone is going downwards, what should you do?
The simple answer is go the other way. But you can’t just increase prices like that. It doesn’t work that way.
You have to take 5 things into consideration first.
Before that, let’s look at the next point…
How Much Is Your Market Willing To Pay?
This is something that there is much confusion about. And truly a hard question to answer.
Many business owners simply look at what the market is charging, and do the same. Maybe undercut their competitors and sacrificing a little bit of profit..
That’s worth it, right?
What if I told you that’s the worst thing you can do. Especially as a new business.
People think that if no one knows who you are, then they won’t be willing to pay.
If that were true, then many high-fashion brands would have started selling products at rock bottom prices, and then slowly increasing.
But we know that’s not true.
Because if it were, then McDonald’s, being the most well known F&B brand, would be the most expensive food in the world. But it isn’t. So there must be more to understanding what your market is willing to pay for than just being a known brand.
So, what is it that influences how much your market is willing to pay?
The 10 Factors of Price Sensitivity
Price sensitivity is basically how much your customers care about the price when purchasing.
1. Can they get the same or similar thing for cheaper from a competitor?
This one is pretty straightforward.
It depends on how aware your market is of your competitors’ prices. The more aware they are, the more sensitive they are to higher prices.
That’s why new customers tend to pay higher prices compared to the more experienced customers.
There is, however, a thing called a zone of indifference.
That is, for customers who are aware of a “benchmark” price, are willing to pay more more if they think it’s acceptable.
For example, if you are running an ad to your market for a low-priced item.
Rather than go and search on Amazon to save a few dollars, since they’re already on the page, they are more likely to just buy on the spot (assuming they are aware of how much it should cost).
2. Is your product unique?
If your product is inherently better than your competitors, then your customers are less price sensitive.
Or, in other words, the Unique Selling Proposition (USP). That’s why companies spend so much money trying to stand out.
People will pay for something unique.
Take beers for example. The reason why craft beers are so much more expensive than regular lagers is because they are generally small batch brews.
Meaning, that it is unlikely that you can find a similar taste profile in “cheaper” beers (or any other craft brews).
And once people find a craft beer they like, they are unlikely to change. Compared to regular lagers which are practically indistinguishable.
3. Is there a cost to switching to a cheaper option?
Cheaper doesn’t always mean more sales. Most of the time people would pay for convenience.
If your competitors are further, take longer to deliver, or hard to find (not searcheable on Google), then they would rather save the trouble and buy from you.
Another cost to look at is social cost. Let’s say in personal insurance industry, if your client knows you, they would be less likely to switch providers just because it’s cheaper elsewhere.
Or, maybe going with a competitor that is less cool can be considered a social cost as well. Which will may your market less price sensitive.
4. Is it hard to compare prices with competitors?
If you are a known provider or seller of a product, your market will be less price sensitive if it’s difficult to compare prices.
For example, buying a car. Is a Jaguar SUV better? Or a Honda SUV better?
Most of the time, no 2 cars have the exact same motors, functions, and specs. So it’s very hard to compare apples to oranges.
When that happens, your market won’t so much look at price as a determining factor when buying.
5. The Price/Quality Effect
This is one of the main arguments for raising prices.
People usually assume that higher priced items are higher quality. Simply because “quality” is not something that’s easy to judge.
We can even argue that “quality” is a meaningless word.
That’s why people tend to use other markers to judge quality. Things like material, weight, sturdiness, and price.
And that’s why the higher products are priced, the less price sensitive people become.
No one in the market for buying a Lamborghini really tries to haggle the price. Compared to someone in the market for Toyota.
6. The “ticket size” of the item
Ticket size is basically how much the item costs not relative to the market, but compared to the income of the customer.
Someone buying a candy bar is less price sensitive compared to someone buying a car.
They may not pay as much attention to the few cents difference between two candy bars. But will consider the price difference between two similar cars.
But as mentioned above, it is also relative to the income-level. That means a middle class person would be more price sensitive about a car compared to someone who is a billionaire.
For businesses who are customers, it is slightly different. Businesses tend to look at the total expense, while individual buyers will compare it to their income.
7. To what extent is emotions involved in the purchase?
You’ve probably heard salespeople say this:
People buy based on emotions and use logic to justify their purchase.
This is also true in the sense that the more emotions are involved, the less price sensitive they become.
Take wedding planners for example:
Couples are less likely to scrimp or go for discount options when it comes to picking out venues, flowers, catering, etc. That’s considered tacky and stingy.
Of course they do have budgets, but generally price is less of an option compared to other factors.
That’s why wedding photographers, florists, and caterers can charge a premium compared to their non-wedding related competitors.
8. Are they spending their own money?
When people are spending other people’s money on themselves, they are less price sensitive.
For example, an employee on the company’s card is less conscious about buying a coffee from Starbucks versus using their own money.
That’s why many travel-related businesses like flights and hotels can increase prices for business travellers.
When children or teenagers are picking out their birthday gifts for their parents to buy for them, they are also less price sensitive.
9. Is this price fair?
Fairness in this context means whether the price is justifiable. It may or may not make logical sense, because sense of fairness is rarely completely rational.
For example, if a store sells a t-shirt for $15 and gives you a $1 discount if you pay in cash. And another store sells the exact same shirt for $14 but charges a $1 surcharge for credit card payments…
Customers are more likely to choose the one with a discount even though they are both technically the same price.
This is because we believe that surcharges are unfair and thus would avoid surcharges if possible.
10. Is it priced in their own currency? How simple is the currency conversion?
Lastly, the currency being used can cause people to be less price sensitive if they are not familiar with it.
I’m sure you’re familiar with this scenario:
You’re on a holiday, and every time you order something, you try to mentally convert it back to your own home currency.
That’s because if people don’t use currencies regularly, they cannot “understand” the true value (so to speak).
Even more, if the difference is not easy to calculate. For example, 1 SGD is about 24 THB.
The difference between 500 and 600 THB wouldn’t feel as much compared to 4 SGD.
That’s why many services like apps or games use in-game currency instead of real money.
This encourages people to be more “trigger happy” and less price sensitive when they are unfamiliar with the currency.
So, How Do You Find The Balance And Increase Your Price?
With so many different factors to consider when it comes to price sensitivity.
What is the right way to charge high and have customers that will pay.
Using this 5-step PIVOT Framework, you will be able to comfortably increase your price and not sacrifice sales.
Here at Elevattic we are BIG on positioning. If you haven’t done so, read this article.
To recap, positioning is the word or category that you occupy in your market’s mind.
You want to be the FIRST to be in that new category.
For example, in laundry detergents, focusing on softer fabric, whiter washes, brighter clothes, are all examples of creating new categories.
We won’t go into too much detail. You can read that article to understand how to position your brand better.
Interestingness & Importance
This is where good copywriting comes in. Is what you’re saying interesting?
Many brands out there are boring. And the truth is, you can’t bore your customers into buying from you.
By finding a unique angle to hook them in, you can get them interested in what you’re saying.
There are many ways to do that such as telling stories, using humor, and tapping into emotions. Specifically anger, fear, or awe.
These kinds of messages can trigger a strong emotional response in people and get them to engage with your brand.
A good example is Dove’s Real Beauty Sketches campaign. They got an artist to draw someone based on how other people described them and compared it with a drawing of how they described themselves.
An idea like this is thought provoking, important, and interesting. It creates curiosity. What is the end result? What are they trying to say?
When you are interesting, you can get your message across more effectively.
Is your offer worth more the price? This is something many businesses are already doing.
Many people think that value and price is the same thing. But it really isn’t.
A can of Coke is the same no matter where you buy it from. Yet, you can get a can for a dollar at a supermarket.
But go to a restaurant, and a can of Coke probably will set you back $3 or more.
In a place like Disneyworld, a can of Coke can even cost you $5 – 8.
There’s no difference in terms of the value, but the price varies.
So, in order to increase prices, you have to manipulate the different factors that add to the value of your products.
For example, giving discounts, free shipping, or adding in free bonuses to increase the perceived value.
This is another word for uniqueness. Or, your USP.
We mentioned above that a good marketer will try to find a unique or original angle to sell a product.
Even if it’s something as simple as a toothbrush. If you can find a unique angle or characteristic that no one else is talking about, people will pay attention.
And when people pay attention, they will pay to get it. Because they simply cannot get it elsewhere.
That’s why it’s important to understand your product on a deep level. Instead of just scratching the surface and going with the obvious angles…
If you know something about your product or can tell a story about it that no one else bothers talking about, then you can easily command a higher price just for that.
Lastly, and the most obvious is trust.
When your customers trust your brand, they are more willing to pay a premium than go for cheaper options that seem untrustworthy.
Things like social proof, expertise, and authority all add to your brand’s trust.
Simply, they want to know that they are not getting ripped off.
And one good way to appease that fear is to talk to them. When customers know they’re dealing with a real person who is just like them, they are more likely to trust you.
That’s why a personable and likeable brand voice is important, where appropriate.
For dealing with other businesses, they want to know whether you can get results. And that your brand is professional.
It is important to convey this fact, because this is a make or break factor.
If your customer doesn’t trust you, they won’t buy from you. No matter how much they like the product.
If you found this article useful…
And want to find out more about how you can apply it to your business to grow. Let us help you. For a limited time only, we are opening slots for our free consultation.
During our consultation we will look through your current business model, sales funnels, and branding peripherals and offer solutions that will get you results.
And if you like what you hear and want to find out more, then perhaps we can work together. There’s nothing to lose.