One of the hardest things in business is to work out what price to charge for your product or service. This becomes even more of a headache if you’re selling a premium product.
Price your product too high and you risk losing sales to competitors offering something (at least in your customer’s eyes) seen as similar, but cheaper. On the other hand underpricing doesn’t just fix your product’s perceived value position at a lower level (making it nigh-on impossible to raise prices later). It also means having to shift a ton more product to make the same profit, and puts you in danger of racing to the bottom.
Over the past 12 years we’ve worked with hundreds of businesses from all over the world. When they first came to us, many of them priced their products inconsistent with customer expectations. Out of those, the vast majority – maybe around 80% – went with pricing lower than it needed to be.
So why do most businesses charge too little?
Using Existing Competitive Products As A Reference
Sure, over time innovative products tend to decrease in price. I remember the days when VHS recorders and DVD players sold for more than $1,000. Today you’d half expect to find one free inside a box of breakfast cereal. Regardless of your political views it’s clear increasing globalization, manufacturing scale, automation, and increased competition means we as consumers enjoy the benefit of lower prices.
If you’re making what customers see as being a ‘me-too’ product, then your pricing is pretty much dictated by the prevailing marketing conditions. If, for example, the competition is selling their MP3 player for $200, the chances that you’ll be able to sell yours for $300 or more is made that much harder.
But did you know Sony makes a Walkman music player that sells for more than $3,000? Of course the Sony model doesn’t seek to compete with players costing $200 – that would be ridiculous. But if you’re an audiophile looking for one of the best portable music players around, the Sony enjoys a strong market position.
Apple’s latest Mac Pro computer, fully spec’ed out, costs more than a Tesla Cybertruck. Is the Mac Pro designed for people who use computers for sending email, making spreadsheets, or surfing the web? Far from it. Apple are aiming their machine at high-end graphics, animation, and video editing professionals. If that’s you, maybe the productivity and legacy software compatibility of the Mac Pro justifies its price.
Sony and Apple aren’t looking to compete with existing products at a particular price point. They’re justifying product pricing through the delivery of quality and performance for a small, but lucrative, market niche. Their clearly-defined product differentiation allows them to charge a premium.
Is Your Pricing Too Low?
Of course, most of us aren’t premium brands like Apple or Sony. Yet startups and small businesses often set pricing lower than their customers are willing to pay.
For a startup with no track record, market share, or industry recognition, pricing is often set low to quickly enter the market and build a customer base. Similarly, a small business will often underprice their products due to conflating pricing with value.
The problem with both situations isn’t just the fact of leaving money on the table. It’s that business growth is made that much more difficult – or maybe impossible – based on the profit margins made on each individual sale. If your sole tactic for growth is selling at the same price or less than the competition to gain market share, you’re commoditizing your value and potentially steering the business towards a downward spiral.
Unless you’re selling a commodity product, the overwhelming driver for your pricing is the confidence you have in your product. Charging less infers you don’t believe you can charge more because, in your heart of hearts, you don’t think you can. You don’t believe you can increase pricing because you’re afraid customers won’t pay more – even if what you’re selling is of a higher quality, or perceived value.
But what you’re forgetting is the underlying message you’re sending to the market by pricing your product lower than it could be. You’re implying your product isn’t worth more.
A common mistake is pricing a product based upon what it costs to make. Firstly, such thinking presupposes people are actually willing to pay that price. It also restricts product development and innovation since you’re focused on the fixed costs of manufacturing, rather than on customer value. Having said that, “cost-plus-X%” pricing does have a place in that it shows your minimum price floor. Such data is helpful for bulk purchasing situations, or calculating margins for distributors or resellers.
From a manufacturing perspective, the price/benefit ratio analysis should really begin at the product development stage. Not only does market research and product pricing analysis provide insights as to what point a product becomes too expensive to make. It can also be used to direct development, highlighting attributes and features customers are most willing to pay for.
A Premium Product Strategy Is About More Than Price
But pricing something higher isn’t just about how much you charge. It’s not even about perceived value. It’s about the whole customer buying experience before, during, and after the transaction.
For an effective and scalable premium product pricing strategy, customer expectations need to exceed whatever yardstick is being used for measurement.
Your product needs to justify its premium pricing not just in terms of function, features, and form. It should exceed expectations in terms of all those imperceptible details that, together, elevate the product to a level seen as justifiable.
What kind of details? Details like starched napkins.
Part of the theater when eating at a fine dining restaurant is noticing the levels to which the owners are willing to go to deliver an exemplary dining experience. It’s things like the crisp, white starched napkins at the table, or how each glass has been polished to within an inch of its life. It’s how the cutlery is positioned just so, and the menus have been freshly printed on quality paper.
Does all of this attention to detail make the food taste better? Of course not. But when you’re paying for a fine dining experience, it’s what’s expected. It’s the same reason why expensive shoes come with fabric bags to protect them. Or how some mechanical watches have glass backs so you can see the movement.
Pricing Is About Everything That Makes The Product
Those small details matter. Combined, they work to reassure your customer they’ve made the right choice.
Pricing a product at a premium level of market expectation is about much more than a number. A premium product includes marketing strategy, branding, and customer service. It’s about the quality of your advertising, how your website looks and works, or how someone answers the phone. It’s about being on time to meetings, what your PowerPoint deck looks like, and the last time your delivery van was washed.
Sure, these are all details that don’t directly influence the quality of your product offering.
Except, of course, they do.