6 questions to help you price your product
Pricing. It's your most effective growth lever.
Thinking about growth hacks and big ways you can grow your company? You should know this secret: price is your biggest growth lever. Most blogs don't mention it and most companies don't leverage it. But a mere 1% improvement in monetization can translate to over 12% increased revenue.
You know what most companies do to set pricing, though? They guess.
The good news is there's a better approach than guessing. There's a way to get on the right track from the start so you can get on the really-right track over time. The right starting track is our focus for today. The 6 questions below involve some legwork. But if you put in the time now, you'll reap profits later. 💰
1. How much does it cost to run your business? (setting a lower limit)
- How to answer: If you haven't already, pull out a spreadsheet and line-item every part of your business. Include salaries, office space, equipment, insurance, subscriptions, marketing budget, and snacks for the team mascot.
- Why it matters: The cost of running your business defines the lower limitof your pricing. This is essential information. You cannot charge below your lower limit and survive. 🚫
2. How much are customers willing to pay? (measuring perceived value)
- How to answer: Use the Westendorp Price Sensitivity Meter to ask customers how much they're willing to pay. It's pictured in the screenshot below (via Price Inteligently).
- Why this matters: The Westendorp meter assesses willingness to pay. This indicatesperceived value - how much customers think your product is worth.
3. What is your product worth? (measuring objective value)
- How to answer: List out the quantitative things (features) your product provides. Then list out the qualitative things (peace of mind). When you combine them, what's the total value?
- Why this Matters: Your product is worth more than its feature list. Its value includes tangible things like your support team. And intangible things like status and convenience. You'll leave money on the table if you only price the feature list.💸
4. What are your competitors doing? (pricing in context)
- How to answer: What businesses operate in your market and target your customers? List these competitors and their price points. 📊
- Why this Matters: Unless you're creating a new market, you're not selling your product in a vacuum. Your customers are already familiar with your competitor's prices. They'll use them as reference points to determine how "fair" your price is.
5. What does your brand communicate? (aligning branding)
- How to answer: Look at your brand and product and figure out what kind of story you want to tell. Are you aiming to enter the market as Whole Foods, Kroger or Dollar General?
- Why this matters: Price tells a story - it's why people assume a $50 bottle of wine is better than a $10 bottle of wine. Your pricing story should align with your brand story. It should also align with how you plan to enter the market. Otherwise, customers are going to get weird vibes. (The I'm-going-somewhere-else kind of vibes.) Imagine how wary you'd be if someone offered you a filet mignon at McDonald's pricing! 😝
6. Do you lack confidence in your product? (aligning yourself)
- How to answer: Pick a starting price based on the questions above. Now, imagine talking to your customer about your price vs the value you generate. How comfortable is your imaginary self during this conversation?
- Why this matters: If you're not confident in your product, you'll price low or price out of fear, not out of value or facts. 😅
- Tip: Talk with your team, your co-founders, and other founders about your doubts. Work with them to uncover whether this is a personal fear of failure or a real hole in your product.
Even if you haven't scoped your MLP yet, think about pricing. The right initial price keeps your company afloat. Don't guess and don't throw darts at the board in the break-room 🎯. Know what you have, what your customers are willing to pay, and what you need to make to stay afloat.
"Pricing is the biggest impact lever on your business: do not improvise it."- Hotjar