Price / Terms

Price is the cost of the product or service being charged to the customer. The "Perfect Price" is the price that meets both the buyer's and the seller's needs. The buyer decides if the price is acceptable by determining the benefits they'll receive and by considering the competition.

The seller prices to maximize profit, while considering the bigger picture business model (i.e., high price / low volume or low price / high volume). The price must pay for the cost of production, marketing and overhead costs, and still make a profit.

Price to Win...

Before you set your exact price, you must decide upon a pricing model - this strategy should be consistent with your overall business model. Pricing always needs to accomplish a goal... but that goal is not always to make the most money, especially when you're selling on the internet. At the risk of oversimplification, there are two basic business models, each with its own objective.

Model #1 Price to Penetrate

Your goal is to penetrate the market fast and deep. In other words, sell as many of the item as possible. So you set your price low. But how low? There's no point in giving away the store. You want to find the highest lowest price that maximizes profits and number of units sold. Use this strategy to establish a powerful position in the market quickly.

Why? The basic goal is to acquire as many customers as quickly as possible. Taken to an extreme, you might even price at a loss. Why? For the powerful reason we discussed earlier… each customer has a lifetime value. That value can be hundreds of times greater than some small gain you might make on the first sale. With that knowledge, you're happy to reduce or forego that first profit.

Penetration pricing is especially appropriate if you sense that more competition is on the way. Lock in the people who see your product / service being offered now. Key point... penetration pricing only makes sense if you keep those customers. There must be a strategy in place to realize that lifetime value. Here's a quick primer on how to convert "first-time" to "life-time." Feel free to mix and match...

1) Stickiness - this is customer loyalty with a twist. Once someone buys from you, does it quickly become too costly for them to switch to a competitor? The costlier it is to switch... the stickier your product.

Offline example - Smart phones. You buy one, spend the time to learn how to program it, how it functions and then you load all of your contacts and pictures into its memory. When a competitors phone comes out that trumps the one you have, you're extremely resistant to switching, since you essentially have to start over with the learning curve for using it, the reprogramming and uploading, etc.

Online example - Consider the amazingly cheap online brokers... it takes a while to learn a system and set everything up. Bingo! A sticky product... The customer doesn't want the hassle of switching.

2) Great product - an outstanding product guarantees the customer's return. You know that they'll be back!

Offline example - Shaving companies realized that they could make much more money in the long run from the resale of razor blades than from the handles. They started to sell the blades at give-away prices. The customers got used to a good shave with relatively inexpensive blades and just kept on buying profitable refills.

Online example - Good books and good prices are a winning combo. Amazon.com has discounted deeply in order to dominate the book (and now every other category!) market in cyberspace. They were losing massive amounts of money due to discounting. But they were building a massive base of customers... lifetime customers. And now the profits are starting to roll in.

3) Freeze-out - this is a variant of great product. You offer an "introductory low price" for a product that is a recurring purchase for a customer. That first sale effectively sticks them to you, not your competitor... providing the quality is there, of course.

Offline example - Buying a long term membership in one gym keeps you from joining another one. You don't join two gyms. Also, magazines - most people purchase Time or Newsweek, not both.

Online example - Web hosting services often offer low "first year" rates to take customers out of their competition's hands. Then as long as they offer good Web hosting, customer stickiness takes over.

What's the bottom line? If you want to establish dominance in the market, you must price to penetrate... even if it means you have to accept low, or no profit margins. You're foregoing the additional profits of a higher price to "buy" this larger percentage of the market.

There is one school of thought in marketing that says that "market share dominance" is the most important factor in the marketplace. The internet raises the bar to alpine levels. If you're pricing high on the internet, you better have a unique and patented product. Even then, you're begging for someone to attack you with vicious price-cutting.

Model #2 Top Pricing

The opposite strategy to penetration is "top pricing." Here the price is deliberately set high in order to reap large profit margins. This is usually at the cost of failing to capture a large number of customers.

The most valid reason to use this price strategy? You're launching a product that's radically new and significantly better than the competition, and you have strong patent protection. The high price attracts and does not deter "pioneers." This strategy helps to recoup your capital costs. Who, or what, are... pioneers?

They are people who want something that no one else has yet. Pioneers are not afraid to be "first" or "unique" -- actually, it's a badge of honor to be the "first one on the block." They aren't particularly concerned about price. Often, to their way of thinking, high price indicates quality.

Such must-have, open-wallet customers are your best friends. If you can equate uniqueness and quality with your price statement, substantial profit will surely follow. In the short term, you receive a good income from the high priced product. But... long term, this comes at the cost of establishing a powerful position in the market by dominating market share (i.e., percentage of the customers). So don't stick with this strategy forever.

High prices tend to attract competitors. They see your big, fat profit margins. They know they can offer a similar product at a much lower price than you're doing, and still take home a fair penny. High price tactics are also known as "selling off market share." You gain income from those high profit margins in exchange for having a smaller and smaller percentage of the market buying your product. There are other valid reasons for top pricing besides "pioneer pricing."

Luxury pricing… you make a top quality product that's among the very best of its kind on the market. You're able to create a certain "luxury cachet" by building a high perceived value. You accept smaller unit-sales in return for higher margin. To thrive long term, of course, you must continue to offer a "best of breed" product and maintain the luxury image.

Pricing a service… If you offer professional services, you may find it preferable to cater to a small number of high-paying clients. Of course, you have to be able to "walk the walk." A diametrically opposite strategy for this same service would be to offer a "cookie-cutter" service to "the mass market" at a much lower price.

Offline example - Apple sold the Macintosh computer (with its unique-at-the time, user-friendly graphic interface) for years at prices that were $1,000- $1,500 above that of the PC clones. That was successful for a while, especially while the competition was pre-Windows 95. In the long run though, their lower sales volume allowed IBM and its clones to become the industry standard. Mac almost died as a result.

Offline example - The DVD. Pioneers covered the R&D costs and delivered fat profits. Over the years, the DVD became fiercely competitive and prices evaporated. Today, it's a commodity.

Offline example - Mercedes Benz is an excellent example of luxury pricing. Unlike the VCR, Mercedes can sustain its top pricing model for as long as it delivers a superb automobile and maintains the image.

Online example - High-end design companies capture a niche market based on their uniqueness which can't be copied. These companies usually can only handle a limited number of clients at a time. Customers are willing to pay a higher price for this selective service.

Before you adopt this strategy, remember that market penetration (i.e., unit sales) will be hurt. Does that make a difference to you? If so, then decide when you will switch strategies. Be careful, though. You have to carefully watch the public relations side of this. If people hate your company for taking advantage of them, your death will be quick and painful. One thing Macintosh always did right -- their users loved (and still do!) the Mac. They never felt taken advantage of, even though they could have bought comparable computing power for far less money.

It applies to services, too… professionals and consultants often don't give enough thought to the rationale behind how they price their services. Basic goal-setting and strategizing upfront will clarify matters. For example... pretend that you're in the price consulting business. One of your services sets up pricing surveys for companies.

Let's examine two scenarios...

Scenario #1, Top pricing - you don't want to grow a huge consulting business -- you just want to support yourself and play with the kids the rest of the week. So you charge a higher price… say $500. The last thing you want to do is to have too many clients, which means working more hours per week and making the same (or less) money.

Scenario #2, Penetration - you want to use this pricing service as your "foot in the door" for your higher-priced services. You don't mind breaking even or possibly losing some money in return for more customers. Each customer has a lifetime value in terms of future business, referrals, etc. So you may decide to offer this service for $100 as an "introductory offer."

Model #3 Price to Kill

Large companies will often price a product at a great loss, just to drive smaller competitors out of the field. In many cases, it's not strictly legal. But who has the resources to fight gray-zone cases?

Now apply this information to your business. Ask yourself these questions…

1) What was my goal when I chose my pricing model originally?

2) Knowing where I am now with my business, should I have chosen a different approach?

3) What are the pros and cons of my pricing strategy?

4) Which model do I see myself using three months from now… with confidence?

Pricing is a complex topic for almost all of us. The key is to look at it from different angles. Each new perspective gives different chunks of information to increase your understanding of pricing theory and how it affects your business.

Objections to price

Prospects object to price when they can't see or don't understand the value of your product / service. Take the time to ask questions so you fully understand your prospects' problems, wants, and needs. Then present your product / service solutions in a way that directly addresses those issues. Often, when you anticipate your prospects' problems, wants, and needs, you can focus on them in your initial presentation. This may allow you to avoid price objections altogether.

An objection may simply be a delaying tactic. Rephrasing the objection, then presenting it to your prospect in different words will help you to clarify whether or not the objection raised is their true objection. Phrases such as "In other words…" or "So, what I hear you saying is…" are helpful for reframing the objection.

You can also rephrase the objection in a way that incorporates your solution; e.g., "In other words, if it were not for X, you would buy my product / service?"  Be sure that you completely resolve your prospects' real issues. Once the objections are handled, don't forget to ask for the order and close the deal.

The Psychology of Pricing

Naturally, it helps to have a keen understanding of human nature. Let's start with the most well known example...

1) The right number

Some prices just sound like less money than other prices that are very close to them in value. Take the price of 99 cents. It sounds a whole lot cheaper than a dollar -- the same way that $9.99 does with $10. Humans buy on emotion first, rational thought second. If they can say "and it's under $50," it's one more plus for you.

Point to take away?

End your price in a 5, 7, 8, or 9 and be on the right side of human nature. Let's also consider what Eric Mitchell, involved with the Pricing Society, observed about the rules of rounding off prices, based on his market research...

For prices up to $10... it makes more sense to use $0.99 rather than $0.95. Respondents' reactions are the same for both numbers. So why leave 4 cents of profit on the table? Odd price endings like $0.74 can sometimes cost sales. They cause some confusion in the customer... $0.74 just doesn't "sound right."

For prices from $10 to $100... ".95" and ".75" price points are much better received than ".99". In this price range, there is a resistance to ".99" because it is often viewed as a "greedy" price point. Think about a restaurant menu... the special of the day is usually set at $12.95, not $12.99.

For prices above $100... It's better to deal in "whole" dollars. From the customer's viewpoint, $149 is a more acceptable and cleaner price point than $148.95. When pricing a professional service… price in whole dollars. Choose $50 per hour rather than $49.75. Never put yourself "on sale." Reception (of a price) is based on perception (of that price). Make it positive!

2) The Value Bundle

Something for nothing… don't we all love that? Value-bundle whenever possible. What's "value-bundling"? Group related products together and set one price for the combination. This works best if the grouped products have a logical association with one another. Customers tend to assign value to a bundle based upon the probable cost of individual "pieces." Value-bundling is a powerful method if the price of your bundle equals the price of the most expensive component. They feel they're getting a "deal."

Offline example - You commonly see vacation packages where airline tickets and ground arrangements (hotels, meals, bus tours and so on) are advertised at one eye-catching price... everything you need for the perfect vacation. If the price of the bundle is just a bit more than what your customer would pay for the air tickets separately, your customer has that wonderful "something for nothing" feeling!

Online example - Most service providers today bundle a number of information products and interactive services together and charge one price for all of them. And then these companies keep adding to it...all for one low price. The bigger the bundle, the better! That's the perception to most customers.