Ultimately your pricing will be based on what your customer perceives it’s worth to be. Customers don’t care how much a product costs to make; they ask how much value it brings to them.
Value is the difference between the anticipated price and the actual price on the tag.Roy H. Williams
If you charge too much you’ll lose sales, but if you don’t charge enough you’ll end up resenting the work and your client will feel it. Eventually you’ll be in over your head.
Nearly 70 percent of customers surveyed said they no longer buy from a particular vendor because of what’s known as ‘perceived indifference.’
This means that they felt they weren’t being cared about enough, as evidenced by things like poor customer service. But only 10 percent said surveyed said they stopped purchasing because of higher prices.
What this tells us is that reminding your customers that you care is actually more important to your bottom line than the prices you charge.
First, let’s look at some common approaches to figuring out the sweet spot to price your offers.
“Cost Plus” Pricing
Cost plus pricing is when you calculate a product or service’s price by working out its basic cost to you, and then adding a set percentage on top.
Make sure you do your homework on what a typical markup is for your industry. Determining how common or competitive your sector is, will determine your margins.
If you own a premium fashion business, for example, you’ll need to add a relatively big markup, because high-end clothes fall out of fashion after the season is over, and you’ll likely have to sell your leftover stock at a discounted price.
A bigger markup ensures that your costs will be covered, even with that inevitable discount sale at the end of each season.
Freelancers often price their hourly rate in comparison to what they’ve historically been paid by the hour.
There are a lot of hidden expenses small business owners neglect to incorporate into their pricing. A major hidden expense is the fact that you won’t be working 40 hours a week while building your business. So what you used to make as a receptionist hourly, will not sustain you if you are a freelance virtual assistant making $12/hour.
Another option is competition pricing, a strategy that involves looking closely at your competitors’ prices and setting yours as far lower as possible.
Competition pricing can be a good approach, but be careful when working with small profit margins. It’s vital to keep your costs carefully controlled; if you don’t, your profits could easily be wiped out. Ask yourself whether you’re really capable of keeping tight control over your finances, because if you aren’t, then competition pricing isn’t for you.
Another problem with this strategy is that you can’t know how much value consumers place on your competitors’ products. It could be that they value your goods more and are willing to pay a price that reflects that.
It seems like common sense to think that your profits are determined by your pricing.
Pricing your services is important, but not nearly as important as adding more value to your offerings. Ultimately your pricing will be based on what your customer perceives it’s worth to be. Customers don’t care how much a product costs to make; they only care about how much value it brings to them.
Instead of matching your competitors’ prices, you justify your higher price point by adding something to your offer for which customers are willing to pay more.
A hairdresser, for example, could make his prices more appealing by including a head massage with every haircut. Value-driven pricing is most effective when the element of added value is something that is low cost to you, yet distinctive and desirable to your customers.
Build the cost of customer acquisition into your pricing
Consider the expense of customer acquisition when setting your prices. Online marketing takes more impressions than ever to convert and successful marketers know to offer a high-value free offer to start to build the relationship. This effort takes time and money.
After they’re in your funnel you offer a low-priced “starter” offer, also known as a tripwire offer.
Think of it like dating. If you’re dating someone new it may take several dinners out before the first kiss goodnight.
To make any price more compelling, introduce payment terms
Payment terms give your customer the option breaking the cost of your product or service down into multiple payments.
So, instead of making one payment of $995, you can give users the option of making 3 monthly payments of $395.
- PRODUCT: SEO Certification Course
- COST: $995
- PAYMENT TERMS: 3 Monthly Payment of $395
Use pricing terms on anything over $1,000. Test terms on any product over $200. Generally speaking, the 1-time payment should be less expensive than the multiple-payment option, so customers have a reason to choose it.
Another way to structure payment terms is to offer annual vs. monthly plans. Discount the monthly price for anyone who pays up-front for the whole year.
In addition to pricing, you need to carefully consider:
- Discounts – the downside is that they eat into your profit. But they also increase your total sales.
- Free Bonus – every product or service can be improved with some kind of free bonus
- Premium Upgrades – what you can add to your product to make it even more enticing?
- Bundles & Kits – take several related products or services and package them in one offer.
- Guarantees – offering a money back guarantee helps your customer feel there is a minimal risk or that it can be reversed.
- Sense of Urgency– your offer will be limited by time (deadline) or quantity (scarcity)
- Championing a Cause – Generally most people want to make a difference and leave the world a better place. Donating a percentage of your sales to charity scratches that itch.
Should you display your pricing on your website?
If your prices aren’t clear, potential customers might not make a purchase. However if you reveal a price associated with your service too soon it could be like getting a nude photo the first time you connect with someone you’re interested in dating. There’s a sequence to all of your marketing. By the time a customer gets to the end of the customer value journey, the request to purchase is natural and price will not be a shock at that point.
Psychological Pricing Tips
Use the number nine.
When setting prices, the number nine can be extremely helpful. That’s because the number signals a value just below a threshold. When consumers see a price with a nine at the end they consider it a bargain. Whether it’s 0.99, 1.79 or 99.99, try out this strategy yourself and see how your customers respond.
Understand that customers are hesitant to make the wrong purchase.
If we know why the customer is hesitant to buy, you can help alleviate concerns with money back guarantees and no strings contracts.
No matter how you choose to structure your pricing, above all else, make sure that it allows for you to spend your time how you want to.
You can always get more money, but you can’t get more time. Once your time has been spent, you can never get it back. Your ultimate goal is to free yourself from the day to day repetitive tasks.