This past summer, we here at Audience Ops have been making an extra effort to talk to our customers about their plans for the future.
See, we’re not just content people – we’re startup people. We’re bootstrapping people. We’re product people, and service people, and marketing people, and management people.
We love to talk to others who are working on building sustainable businesses from the ground up. As part of our featured case study series, we talked to founders from various service-based businesses, and we heard some common themes.
One note that kept coming up? The struggle to figure out how to price a product or service is very, very real.
As Audience Ops founder Brian noted on his visit to the Mixergy podcast: Pricing is an art and a science.
Professor of management science at George Washington University Charles Toftoy agrees: “It’s probably the toughest thing there is to do,” he told Inc. magazine. “It’s part art and part science.”
Figuring out how to price your products and services correctly helps you position your business for success and growth. Pricing too low or in a way that inhibits growth can haunt your business for a long time.
With that in mind, we looked at some of the guiding principles behind the science and the intuition behind the art of pricing.
The Science of Pricing
We’d recommend starting with some of the hard stuff – hard numbers, that is. Whether it’s data, industry benchmarks or calculations, you’ll need a starting point that isn’t just a number you’ve come up with in your head.
Here are a few things to know about pricing models that can affect your ability to scale your service or product:
Knowing Your Costs and Your Revenue Requirements
Before you can set prices, know how much you need to make to sustain your business. How much does it cost to make your product? How much overhead (things like employee and contractor salaries, office space, etc.) do you have? What are your taxes? How much do you need liquid to cover incidentals?
Ultimately, your costs have little to do with what your final product price should be, as long as you’re not charging less than you’re spending.
By that we mean: You shouldn’t peg your price to a certain amount as a function of what it cost to make your product.
How this affects growth potential:
Your “at cost” price will tell you how much profit you stand to make from each sale – crucial information for calculating and planning for growth.
Reviewing Classic Pricing Strategies
When it comes to figuring out how to price your particular product, it’s a good idea to visit some classic business pricing strategies.
- Skim pricing: This method refers to “skimming” profits from different tiers of the market. You’d set the price of your product to compete in a certain tier (for instance, the most expensive tier), then when you feel like you’ve exhausted that market, you adjust and aim for a different tier.
- Product line pricing: If you have multiple products, you may need to think of your pricing relative to all of the existing offerings. If your new product is way more valuable to your customer than a previous one, your price should reflect that. This is also a good chance to consider if you still need all your offerings at the different price points.
- Penetration pricing: This pricing strategy aims to quickly exploit a potential weakness in a market and gobble up market share. Think of Amazon running a loss for years while setting super low prices on books to blow brick-and-mortar bookstores out of the water competition-wise. Using artificially low prices on one product line, they were able to grab market share and not relinquish it (by introducing other product lines to make up for low book prices).
- Competition pricing: Easily confused for penetration pricing, this one is more about setting your price in direct comparison with your competitors. This could be higher, lower or the same, but your primary benchmark is their pricing instead of another factor.
- Cost-based pricing: This one involves pricing based on how much it costs to make your product. As we mentioned above, we wouldn’t recommend this for digital-based businesses especially, since it’s pretty unlikely your cost to make your product comes anywhere close to its value to your customers.
- Value-based pricing: Pricing based on the value of your product to your target customer enables you to keep your creation costs low while not under-pricing yourself. This is the way we’ve gone, and the way most digital creators choose to go.
How this affects growth potential:
Knowing the basic models behind the classic pricing strategies can help you identify one that might work in your case, but overall the biggest lesson to learn here is this: Your pricing needs to align with your business goals.
The Art of Pricing
Once you have an idea of some of the numbers out there and what you need to be making on each product based on your own calculations, it’s time to dip into your pot of intuition.
Getting Your Mind Right
Repeat after us: You’re in business to make a profit.
Unless you’re a nonprofit, then everything you do should be aimed toward profit. Of course, you could have other additional goals, such as what you’d like to do with that profit, or other benefits to your customers or employees stemming from your business’ existence – but ultimately, you need to make profit to do all of those things.
Sometimes startup founders shy away from the idea that they’re in business for a reason other than changing the world.
Sure, it can feel kind of crass to declare your intention to make money, but that’s part of getting your founder head on straight. You need to be profitable to accomplish all your mundane and world-shattering goals.
How this affects growth potential:
Don’t underestimate the value of a company founder’s mindset. If you’re not clear on why you’re in business and what problems your product solves for customers, nothing about your business operation will be as focused as it needs to be for success.
Talking to Customers
You can debate with yourself or your team all day about how much your customers value your product or how much the market will bear, but it’s hard to beat talking to the people who will be paying for your service.
Of course, people are apt to say things they don’t mean, especially if they’re your friends or peers. You might hear a lot of “Wow! That’s a phenomenal idea and I would pay thousands of dollars a month for that!” only to hear something different when it comes to actually parting with money for your product.
SaaS business guru Lincoln Murphy at Sixteen Ventures believes strongly that “only intel from paying customers is valid when you’re trying to get intel on how to charge customers.”
There’s definitely value to the idea that beta and early users “won’t give you the same intel…as customers that pay you something.”
When launching Audience Ops, our founder Brian combated that issue two ways:
- Talking to a group of people who had already expressed interest in a solution to their content marketing problem, with the idea that we wouldn’t count on them as customers, but use their feedback to assess market fit; and
- Launching to an initial cohort at a set price and using feedback from those customers to refine the offering and the price following the initial launch.
How this affects growth potential:
Getting into the habit of talking to real, live people when it comes to making business decisions sets you up for more success than relying solely on data. Salting everything liberally helps you not get led around by the nose or overreact to customer comments, but in the end there’s no one who can tell you more about how your customers experience your product.
When it comes to pricing, combine your qualitative feedback from customers with what the data is telling you – someone may complain about the price, but happily pay it month after month and fully succeed in using your product, or vice versa.
Being in touch with your customers can help you figure out the best way to position inevitable price hikes and other service changes too.
Using Psychological Principles
As humans, your customers and potential customers respond to all kinds of psychological stimuli that you can use to encourage certain reactions to your pricing. We like to think of this as benign manipulation – helping customers make that jump to purchasing your useful product or service.
Gregory Ciotti over at Help Scout (our customer ticketing product of choice, incidentally) wrote a super in-depth post on pricing psychology that we’d recommend checking out. Here are a few of the top ones we see successfully deployed:
- Premium: In a somewhat counterintuitive way, humans are wired to equate more expensive items with higher value, whether or not that’s true. Of course, you’ll have a ceiling where you’ve gone too high, but instead of undercutting yourself and looking like the “cheap” option in price and quality, go for the higher tier by pricing at the top of your range.
- Bundling: When you get multiple things for one price, you feel like you’ve gotten a ton of value. Try packaging a couple different products together, or throwing in an additional small bonus product at a middle or higher price tier. This can help you charge more without changing your cost inputs that much.
- Anchoring: As Gregory at Help Scout puts it, “the best way to sell at $2,000 watch is to put it right next to a $10,000 watch.” This works with our cognitive bias that makes us rely more heavily on the first piece of information we see to make a decision. Seeing the $10,000 watch gives us a mental value benchmark, which results in the $2,000 watch seeming like a great deal.
Remember: Nothing’s Set in Stone
Ultimately, you have to set a price. That’s the bottom line (literally).
So if you find yourself waffling and testing and agonizing and questioning, it’s time to just stop and set a price. If you set it too low, your company won’t implode in a week. If you set it too high, your company won’t implode in a week.
Set a price, and then test and measure. Then test and measure some more.
Look at the customer success feedback you’re getting – do the comments indicate an issue with the way you’ve positioned your product for that price? Do they tell you that people expect more for the price? Are you getting feedback that your product’s value is higher than your price (actually a common thing we get here at Audience Ops!)?
If you’re being diligent about updating your pricing as soon as you realize there’s an issue – and understanding that price is just one of the locus points for your product’s success – then you’ll be able to adjust to get to a sweeter sweet spot before incurring any damage.
We’ve adjusted our prices a few times since our launch in 2015, and as our services and company evolve, we’ll probably adjust them a few more times. Nothing is set in stone, and while it’s important to know your price is right, understanding the art and science going into your pricing strategy will keep you flexible – and growing.
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