So you’ve decided on a new product and maybe even have it developed or produced. Now…how should you price a product?
Accountants have a standard pricing formula they often recommend called the cost-plus pricing formula: [overhead and materials expenses] + [profit] =price. It’s easy to figure out if you have a product and concrete expenses.
But what if you have a service? How do you account for the experience you bring or the results you provide? Pricing a product can be a difficult task, but a service can be even more challenging. However, with the right strategy, it can be done successfully. Here are a few key things to keep in mind when pricing your product or service:
Start with Your Ideal Customer
If you really know your one ideal customer, you will know what they would be willing to pay. If they are a high-end luxury client, you will be able to charge more than if they are budget-minded. You can raise or lower your price based on the feedback (and the number of sales) you get from this client.
If you don’t know who your ideal customer is, you can start here with this free download.
We tune out most of the marketing messages we hear for a valid reason: we don’t need or want what they’re selling. No matter how enticing the offer, if we don’t need it, the message will fall on deaf ears. Most people will be in this category because they are not your ideal customer. But when you know the needs and pain points of your ideal customer, you can have a conversation with them through your marketing messaging.
Walmart does not market to the same buyer as Neiman Marcus. We can’t be all things to all people. But we can classify all buyers into three types of categories, based on how they spend money; I call them Penny-Pinchers, Big Spenders, and Average Buyers. Roger Dooley, in his book Brainfluence, breaks down these types of buyers, and your ideal customer is likely one of these three:
Penny-Pinchers
Penny-Pinchers are 24% of the market*
- They like to stay within a budget.
- They like sales and bargains, or price breakdowns.
- They prefer package deals to per-unit pricing.
- They respond to value propositions; tell them how much are they getting for their money.
- Use numbers, data, and analytical resources to persuade this type of customer and show them they are getting a great deal.
Here is how you should sell to them:
- Focus on the functionality of the sale. They are less swayed by emotion than by function.
- Break down the cost for them: “Only $20 per month is only a few cents per day”.
- Focus on the benefits of the sale and how their problem will be resolved.
- Sell to them by offering bargains and package deals (all-you-can-eat vs ala carte menu).
- Use data to show the value of your product and offer financing for larger purchases.
Big Spenders
15% of the market* falls into this category. They like to spend money so they…
- Don’t need much convincing.
- Marketing to their emotions works best.
- Respond to photos.
- Like luxury products and services.
- Like credit.
- More likely to purchase a “suggestion sell” item, such as polish to go with shoes.
- Respond to how your product appeals to both practical and indulgent uses.
Sell to them by
- Appealing to both their indulgent and practical side.
- Show them photos and appeal to their emotions.
- Show your product as an upscale choice.
- Use testimonials of people who are successful.
- Break down the benefits of your product in both an emotional and practical way.
The Average buyer
61% of consumers* fall into the average buyer category. Generally, they…
- Respond to a mix of emotion and metrics.
- Like guarantees, return policies, and free shipping.
- Love bonus extras.
- Occasionally buy on impulse.
- Consider value, features, and benefits.
- Are influenced by facts and numbers, but look at other factors too.
- Think about their decision before purchasing.
Sell to them by:
- Appealing to both the emotional side and the rational side of their personality.
- Offer free shipping and or bonus material.
- Follow up with them to give them time to make a decision.
Identify the Value of the Service you Provide
Pricing can also indicate the quality of your product. That’s why you won’t find that same outfit (or the same pricing) at Neiman Marcus as you would at Walmart. Our expectations of the producct or service change based on the price and where we’re buying it. We expect better customer service experience at a high-end boutique than we’d get at Target, for example. Often when we’re pricing our own services we start lower than we should because we’re afraid we will scare off customers if our prices are too high. But truthfully, we also make judgments on the quality of the product based on the price. So it’s really a balancing act, and you may have to adjust your pricing based on the feedback you receive from customers.
If customers really want something, and their convinced it will help them, people can usually find the money. Focus on the transformation you can bring to your ideal customer–how it can change their life or stop their pain–then it becomes a more powerful conversation. For example, I’ve been looking for new running shoes lately. I want something with a lot of cushioning since I typically run on hard surfaces. I don’t want to spend a lot of money on them, but I also understand that I will have to pay more than I’d like to get the type of cushion and support I need because it solves my problem. I am willing to pay what it costs to get the help I need, and most of your customers will too.
Messaging
How you talk about your service is extremely important. You will want to communicate how your offer…
- Is unique in the market: when everyone is offering the same thing, people will compare on price. If you offer something that’s unique, they won’t be able to do that.
- Meets a need or solves a problem they have: show how it will change their life.
- Counters objections they may have: anticipate why they may not want to buy right away.
- Paints a picture of their life if they don’t take action: inaction has a cost too. Let them know what that would look like.
Also, people buy on emotion (and justify it with logic), so subtle nuances to our website, landing page, and presentations can communicate things subliminally that they may miss in the messaging. Step inside a high-end boutique and you’ll see the impact that details can communicate.
Bundling your services
Bundling your services together and selling them in packages gives your customers value while still giving them options. This also helps avoid the “dollars for hours” trade-off that happens with service providers sometimes.
When I started a design business several years ago, I began by charging clients an hourly rate. But this created several challenges. First of all, clients were not always aware of how long it would take to design a logo or website, and it produced some sticker shock. Also, there was a cap on how much money I could make; it was the maximum hourly rate I could charge in my region x the number of working hours in a year.
Once I created packages for my design work, I was able to combine services together and price them based on what it typically took to get it done. For example, I created a “New Business” package that included a logo, a business card design, and a simple website. I was also able to add printing of the business cards for a nominal price. The benefit of doing this was I could lay out parameters for what that package included, and offered additional features at higher price points. It was valuable for the customers since they had everything taken care of at an agreed-upon price, and it was valuable for me since I could work quickly to create them.
Be Aware of Your Own Money Story
We all bring a money story to the table. What messages about money did you hear when you were growing up? If you were like me, you heard phrases like “money doesn’t grow on trees” or “a penny saved is a penny earned.” We often assume our customers are coming from the same place. If we’re not aware of this, we can communicate it inadvertently through our pricing, and it can become an unintentional barrier to getting what you should for your product or service. If we can’t afford something, that doesn’t mean that our customers can’t either. Be aware of your bias so you can control it, so you won’t leave money on the table.
Have you had challenges pricing your product? How did you overcome this? Let us know in the comments below.
*According to a survey by Carnegie Mellon University.
