Let me tell you a pricing secret: Customers don't really want the lowest price.
There's a ceiling customers won't go above, but below that is often a broad range of prices they're willing to pay.
What customers really want is the greatest value.
What Customers Want
My company, which sells labor and services, experiences a spectrum of bidding behavior. Our users are selling their time - and they value their time differently based on their experience and seniority. They view bidding as part of the opportunity cost of consulting.
But in many cases, when they land on a project they'd really like to work on, they lower their prices, thinking a lower cost will increase their chances of being selected. However, what we've found is that the lowest bidder almost never gets the job - the person who appears to provide the biggest bang for the project manager's buck does.
Companies like Intuit and Salesforce.com have experienced wild success because they've found the sweet spot between value and cost.
For Intuit, QuickBooks provides customers a value that far outweighs the $200 price tag. In the case of Salesforce.com, the increased efficiency of just a single salesperson on the system justifies the $60-100 monthly cost.
Yet, in both cases, the margins are high enough to allow the companies to make a healthy profit.
How to Test Prices
Pricing isn't a pure science. There's a lot of trial and error that goes into it, and it's wise to play around with your price so you understand what the market will tolerate.
Still, there's a simple formula to help you start testing:
- Determine the cost to produce or deliver your product.
- Estimate the true value your customer receives. (For example, Salesforce.com provides monetary value to the customer that far exceeds the $100 cost.)
- Use the cost to produce and the value provided as your "pricing bands." Your price should never go below the cost to produce or above the value the customer receives.
Tips for Finding the Perfect Price Point
Now that you have a range to experiment within, here are a few more tips to keep in mind:
- Talk to as many customers as possible. Surveys are OK, but face-to-face talks are better. You may discover that they're thinking about pricing much differently than you are.
- Deliver even greater value than your customer is paying for. It's a fine line because you don't want to sell yourself short, but providing more value will increase customer loyalty in the long run.
- Be transparent. No hidden fees!
- Monitor behavior to optimize pricing. Some customers are more price-sensitive than others. Is there a way to offer different price points so you can capture a wider market?
- Test your pricing structure. Price increases can be hard to roll out, but it's important to test the market and make sure you're selling at the right price point. If you're truly providing value, marginal price increases won't hurt. If sales slow down, you may have gone too far.
When you're just starting your business or freelancing career, pricing can be difficult to understand. To choose the perfect price for your product or service, follow the formula as closely as possible, but be prepared to test and adjust over time.
And remember: Customers don't really want the lowest price; they want the greatest value (Tweet This!). So make meeting that pain point your ultimate goal.
Rob Biederman is the co-founder and CEO of HourlyNerd, a service that connects businesses to top MBA students and alumni to solve critical business problems at affordable prices. Connect with Rob on Twitter and Google+.
(Image via freedigitalphotos.net)