It’s a question that bothers freelancers, entrepreneurs, and big business chains all equally: what is the right price tag for your product or service? Some companies depend on formulas to answer that question while other companies depend on gut instincts. Most do a bit of both.
Still, lots of startups aren’t getting it right. With “ran out of cash” sitting as the second most common reason that startups fail and “pricing/cost issues” being the fifth, according to research by CBINSIGHTS, your concerns are well-founded. Get the price right and your business might just thrive. Get it wrong and your business will likely crumble.
To be sure, the price tag you choose for your product or service isn’t the only determining factor of your business’ success, but it’s an important one — one that, if done poorly, can undermine your most savvy marketing and branding efforts. But how much is too much? How much is too little? And where is the golden zone? To answer that, ask yourself these four questions.
1. What is your minimum viable price?
The first step to determining the real value of your product or service is to determine what you can’t charge — that is, the price that would give you a negative ROI. Here’s a helpful formula that Chron provides for finding your break even sales price:
“Break Even Sales Price = (Total Fixed Costs/Production Volume) + Variable Cost per Unit”
Your goal is to find how much you need to charge in order to make your money back and break even. With that, you now know that you must price your product somewhere above that threshold. And don’t forget to factor in hourly pay (your own included), especially if you’re offering a service.
2. What does your competition charge?
Perhaps the easiest way to determine what you should charge for your product or service is to see what your competition is charging. After all, if your target market knows about that competitor, then there’s a sort of precedence for that price-point and you’ll need to justify any price that’s significantly higher or lower. But make sure you’re not comparing apples to oranges — Walmart might charge $15 for a pair of sunglasses while Oakley charges upwards of $100, but that’s because they’re serving different markets.
An example of this is the cost of Netflix’s, HBO’s, and Amazon Prime’s Video subscriptions. Each costs somewhere between $8 and $15 per month, not journeying too far outside of those price points so as to remain affordable and competitive in the eyes of their target market.
3. Are you selling high-ticket items to a few people or low-ticket items to a lot of people?
To find your ideal price, you also need to determine who your competition is and who your target market is. If you’re selling blue jeans, for instance, that doesn’t mean you’re automatically in competition with GAP, and it certainly doesn’t mean that GAP’s target market is the same as your own. GAP is a company that sells affordable, middle-class clothing en masse — that is, they sell a reasonably priced item to the average person (i.e. lots of people).
Gucci, on the other hand, sells clothing for hundreds or even thousands of dollars to celebrities and top earners. Is the clothing itself all that different from GAP’s? Not necessarily. But Gucci’s marketing, product messaging, experience, and, of course, price all speak to a high-ticket target market and intentionally exclude lower- to middle-class consumers.
When selling a service, this is the difference between being the high-ticket, $5 per word copywriter and being the $0.10 per word blog post writer — prospects immediately presume to know the quality and value of your writing based on your price (perceived value). For that reason, make sure that the price you choose targets the market you intend to serve.
Here’s how Joe Auer, the founder of Mattress Clarity, an online mattress review site explained it when I emailed him about this concept: “If there’s one thing we’ve learned from having our fingers on the pulse of the mattress industry, it’s that every price-point sells — it doesn’t much matter what you charge for your product. What matters is how you market that product and who you target. There’s a market for every price-point, you just need to make sure that your pricing, marketing, and audience all align.”
4. What is the expected ROI on your product for your customer?
Sometimes, the easiest way to make a sale is to prove to your prospect that your product is going to pay them back tenfold. For services, this can be as easy as illustrating the ROI of your past efforts with clients or members (a case study, for instance) and justifying your price in that way (i.e. “My service costs $5,000 but I made this past client $50,000”).
When selling to consumers rather than business owners, this “ROI” becomes a bit more ambiguous — you often have to measure the consumer’s perceived value rather than a tangible dollar amount. For instance, how much will someone pay to avoid this pain they’re experiencing? Or how much will someone pay to experience this pleasure I’m offering?
In the end, the consumer and what they expect will determine how much you should charge for your product. I like the way that Ron Johnson famously put it: “Pricing is actually pretty simple… Customers will not pay literally a penny more than the true value of the product.”
You want to make as much money as possible per sale, but you don’t want to discourage your target market from purchasing because of a too-high price tag. The trick to determining the ideal price for your product or service is to find your minimum viable price, examine your competition, choose your target market, and set the expected ROI for your customers. With that, you will have found the real value of your product or service — the price your customers can afford, your marketing campaigns can support, and where your business can profit.