The price of your offering is both one of the most important and most complicated things to get right as a creator. Not only does your pricing model keep the business alive, it's also a valuable weapon in your positioning playbook. Add to all that the fact that price is harder to iterate on than any other part of your business and you can see why pricing keeps nascent creators and founders up at night.
With that in mind, we are going to explore the art and science of effective pricing. Specifically, we'll be focusing on:
- Cost Plus Pricing
- Competitive Pricing
- Value Based Pricing
- Tiered Pricing
1. Cost Plus Pricing
This one is simple - you first calculate what it costs to produce your product/service and then add a markup. In most cases, however, the value you're providing will far exceed the costs of doing business. So if you price this way- even if you include what you consider a healthy markup- you're probably leaving money on the table.
2. Competitive Pricing
Competitive pricing denotes the pricing of goods and services based on the prices of competitors. It hinges on the idea that your competitors have probably already done their pricing homework and so it's more efficient to just copy them rather than doing it yourself. While this is an efficient way of doing things, it's not always effective.
It's easy to reason by analogy- 'they're charging $X, so I should too...' but it's also a great way to get trapped in a race to the bottom through industry groupthink.
It's better to reason from first principles. That is, to build your understanding from the ground up rather than relying on consensus or convention. You need to figure out how much value you're providing for customers and then charge accordingly.
3. Value Based Pricing
Our first two pricing strategies pay little attention to the customer- focusing instead on production costs and competitors. But customers only care about how much value they're receiving at a given price.
There are many methods of discovering how much value you're providing to customers but the most popular is the Van Westendorp Price Sensitivity Meter.
The Van Westendorp Price Sensitivity Meter
The model is based on the idea that it is not enough to simply ask consumers what they think a certain product or service should cost. Rather, there is usually a price range the consumer is willing to pay for a product or service.
To determine the limits of this range, ask your target audience four questions.
- At what price would the product or service be too expensive so that you would not consider buying it?
- At what price would you describe the product as expensive but you would still buy it?
- At what price would the product be too cheap for you to doubt its quality and not buy it?
- At what price would the product be a bargain, i.e. a great buy for the money?
You'll need to add these results to a spreadsheet to plot a graph to get the optimum amount to charge, X-axis = price, Y-axis = cumulative % of respondents who quoted that price.
You need to plot 4 curves:
- Too expensive
- Not expensive - take the inverse of the responses to Expensive (ie 1 - cumulative %)
- Too cheap
- Not cheap - again take the inverse of the responses to Cheap
The point at which the curves "too expensive" and "too cheap" intersect is called the "Optimal Price Point". Although, the price can fall anywhere within the range between the point of marginal cheapness and the point of marginal expensiveness (as illustrated above).
If this all seems a little excessive, you can always just calculate the median responses to questions 2 and 4 above and choose the more suitable option for your target market as your price (2 for a premium product, 4 for anything else).
4. Tiered Pricing
Tiered or Good-Better-Best pricing means offering customers three options for a particular product at increasing increments of price and quality. G-B-B is all around us, in everything from the popcorn we eat at the movies to the software we use to run our businesses. Why? Well, it works- drawing on the principles of consumer psychology, G-B-B is a powerful shaper of consumer behaviour. A tiered pricing plan helps your potential buyers focus, think about what they value and how much they're willing to pay for them.
Moreover, G-B-B can shift consumers from a binary buy/don't buy decision to consideration of incremental value and spending- making them more likely to spend money.
When pricing your services on Quorum or elsewhere, it's a good idea to adopt some form of G-B-B. The Good offer may be a $5 per month group of like minded individuals, the better a more exclusive group with more personalised services, and the best a one-on-one chat with fully customised services.
When pricing your offering, it's best to focus on the value you provide to your customers, not on production costs or on what prices your competitors charge. These can be good heuristics, sure. But the only way you'll set a price that your customers think is fair is by getting their input.
More resources on the Van Westendorp model - https://www.greenbook.org/marketing-research/the-price-is-right-using-van-westendorp
Good Better Best pricing - https://hbr.org/2018/09/the-good-better-best-approach-to-pricing