Excerpted from the book on mindful business management, Business Black Belt
If 10% of your customers don’t complain that your price is too high, then your price is too low.
Pricing is a touchy subject, but to a good sales and marketing person, it can be a useful tool rather than a subject to dance around.
As a young salesman, I was always afraid of selling something for a high price. My boss at one time screamed at me, “You’re too chicken-shit to sell the product!” Obviously, I couldn’t really grasp that our product was worth what we were charging. Many people in sales suffer from the dilemma of not being able to afford their own product, so they project that same fear onto their customers.
There’s a saying, “Those who can’t sell give the product away.” I did that because I didn’t fully understand the value of my product, service, and all of the materials as well as emotional factors that would compel a customer to buy from me. Given that, how could I make sure my customer fully understood the value of everything that was included in our price? So when you set a price on something, you must consider all of the factors in your customer’s universe where your product or service provides value. All things considered, what would it be worth to them to buy from you? The effort you invest here will pay off in your ability to sell at higher prices and generate more profits. Just make sure your promotional materials and sales training also incorporate these value factors. In the case of JIAN, we know that an entrepreneur or business owner would pay an outside consultant anywhere from $1,300 to $7,000 or more to write them a business plan, a fair price for the work involved. Having written a number of business plans myself, I have a sense of how much work it’s going to take. And we remind customers in our literature of the effort and time they’ll save by buying the product. We can easily sell BizPlanBuilder for $100 because we know that we’re giving people more than $1,000 worth of value.
If you were your customer, how much would you pay?
You don’t really want to price your product or service based on its cost to you. In other words, your cost of goods is not relevant to the price of your product or service. I was standing in an art gallery when I overheard a guy telling his girlfriend that he couldn’t believe the artist wanted $30,000 for a painting. “The canvas and paint could only cost a few dollars,” he told her. Obviously, he didn’t understand art. The value of the painting has nothing to do with the cost of canvas and paint. Software provides a similar example. The cost of goods for software is about $5 to $10 (or $0 if it is a download), yet people will pay $100 to $500 and more. In our line of products, you get thousands of dollars of expert advice for $100-$300. You couldn’t touch it for that little money any other way. That $100-$300 investment is a no-brainer. As a businessperson, I’m selling based not on my cost, but on the fact that our customers will leap at solving a $5,000 business problem for only $100-$300.
Picasso once doodled on a piece of paper and asked $10,000 for it. Someone complained, “It took you 30-seconds to do that!”
“No, it took me thirty years,” Picasso replied.
Include your price in your advertising
When I become interested in a product or service, the next thing I want to know is its cost. One school of thought is to not state your price in your advertising. The theory goes that customers will be curious and call or circle the number on the reader service (“bingo”) card. Then you have a chance to get in front of your customer and give them your pitch. As a customer, I’m seldom that curious. I’m more concerned that the price is indeed out of line, the seller is playing games or is holding out on me (what else aren’t they telling?). I’m a big boy, I expect to pay for what I get. The way I figure it:
you are afraid it might be too high.
I want one! The price actually gives me a goal to shoot for. On the other hand, a wealthy person may look at this ad and think, “Hey, I can afford that!” Until then, they may have only wondered in passing what it would take to have a Lamborghini and may have even been embarrassed to ask! On the other hand, it helps to disqualify customers—now they don’t have to deal with tire-kickers who waste time asking for the price!
Not printing your prices in an expensive color brochure can make practical sense if you will be changing your prices, making special offers, or using the brochure for resellers as well as end-user customers. At least, include a current price list somewhere along with the brochure.
A common pricing calculation mistake
As long as we’re talking about pricing, let’s look at the math. You have several ways to price a product. You can base it either on cost or mark it up based on a target profit margin. (Remember that if you want to earn 30% on the selling price, you would divide your cost by .70 (1 – .30 = .70), not multiply your cost by 1.30. For example, $100 / .70 = $142.86. The $42.86 profit equals 30% of $142.86. On the other hand, $100 x 1.3 = $130; the $30 profit is only 23% of $130.)
See what everyone else is asking and charge a little more
By charging just a little bit more than your competition, you will often be perceived as offering higher quality. If you’ve done your homework, people might think, “Why not pay a little more to get the best one?”
People who buy the good stuff are more fun to work with. It feels better and it’s more fun to do something right. A higher price enables you to make a better product. Make it the way it should be made; offer a service the way it should be done. People will usually invest a little more to get the good one. There’s too much junk in the world. The last thing we need to be doing is making more cheap products that will break and litter the planet. Likewise, offering cheap services just tick everyone off because something wasn’t done right. How do you feel when you drive a cheap car? When you use a cheap tool? Sit in a cheap chair? Eat cheap food? Wear cheap clothes? What are you saving your money for? Save it for a cheap funeral.
Price test via direct response
Assuming your product or service can be purchased through the mail or over the phone, a very effective way to determine the best price is to use direct mail testing. This is very simple, much more reliable than focus groups, and is much cheaper. Simply mail batches of 3,000 to 5,000 mail pieces which are identical except for the price. 3,000 to 5,000 names should provide a statistically respectable result. You can mail 4 to 5 or more batches with each batch promoting a different price point in a range. For example: $49, $59, $69, $79, $89, and $99. I like this much better than focus groups that will give you theoretical numbers, whereas a direct mail test will provide the reality of real customers voting with real money.
Business Black Belt Notes
- People who can’t sell give the product away.
- Maintain your respect for the value of your product or service.
- Price things by understanding the value of your product/service and how your customers will benefit.
- Find out what your competitors are charging and charge a little more.
- Include your price in your advertising.
- If practical, use direct response to test your price.