Pricing Myths Exposed

There are a lot of myths out there about pricing your product or service an some fly directly in the face of popular thinking (and what I've stated in the previous section).

Myth # 1 - Price is the consumer's most important buying criteria.

Truth - Yes, price is important but it is no way the most important criteria for a shopper.  I've never seen one study that has shown price to be the most important buying criteria for a consumer.  In fact, most studies I've reviewed show price to come up around fourth place on the importance list.

Just look at those who pay exorbitant prices to buy brand clothing such as Ralph Lauren or Tommy Hilfiger.  How about those who buy goods at the local gas station or 7-11 store whose prices are astronomical.  Remember the Cabbage Patch Doll or the Tickle-Me-Elmo craze?  Prices went sky high because the demand was so high for them.

Even if you have a product that you think is a commodity, there are a myriad of other ways to differentiate your product or service so that you can charge a higher price (which leads me to the next myth).

Myth # 2 - You have to match or slightly under price your product or service in a commodity driven or competitive market.

Truth - There are so many ways to differentiate your product or service that it baffles me why businesses continue to believe this myth.  Here are just a few ways you can differentiate yourself:

	Specializing in a particular niche
	Adding bonuses or premiums
	Delivering it faster
	Touting your experience or credentials
	Showing successful case studies
	Having others testify to your differentiation
	Limiting distribution or accessibility
	Partnering with heavy-hitters
	Having extreme guarantees
	Etc. etc. etc.

There are a myriad of ways to differentiate your product or service.  All it takes is a bit of creativity and some good marketing.  You should never have to just accept the prevailing price of a product.  Price-takers get eaten up and spit out.  Price-makers spend their vacations in Hawaii.

Myth # 3 - Pricing is a simple matter of taking the cost of your product or service and marking up your desired profit margin.

Truth - The fact is that most businesses don't know their costs so even if they wanted to do cost-plus pricing they couldn't.  If you don't know your cost how can you "mark up" your price?  In addition, the cost-plus price may have nothing to do with the value you provide or the market price of your product or service. 

Even though you may not be able to determine your price, you should be able to approximate it.  It's better to be approximately wrong than to be precisely right.  In any pricing scenario, you must know the approximate cost of your service so that if you are losing money, at least you know it and it is part of your strategy.

Myth # 4 - If sales are lagging just drop your price and sales will increase.

Truth -  Just open the paper and count the number of times you read the word, "sale."  The truth is that people do put a high value on price but they also put a high value on quality and when you lower your price you cheapen the perception of your quality.

If you lower your prices just to increase sales you should have a good reason.  If you believe you'll be able to upsell your new customers or you believe that can backend them with bigger offers then your strategy is justifiable.  But if you just lower your prices to increase sales you could be just speeding up your losses.

Price is a Perception of Value

It's important to remember that you must sell your product or service at a price that is higher than your cost to produce and promote it.  That's called a profit.  But perhaps, even more important is knowing that your customer will only buy your product or service if they determine that its perceived value exceeds the price they have to pay to receive it.

Price is a perception of value and has little to do with actual value.  The whole goal of your marketing efforts is to spread the word and convince people that the value is higher than the price they are being asked to pay.

I'll never forget a story I once heard about a fellow who approached the legendary marketer/copywriter Gary Halbert to ask about the seemingly high price he was planning to charge for his new product.  He asked Gary, "Do you think people will pay $XX dollars for my new widget?"  Gary's reply is profound and something you should always remember.  He said, "I don't know.  How good is the sales letter?"

I love this story because it summarizes everything that is great about the power of good marketing.  Your product or service's price has nothing to do with its actual value.  It has everything to do with it's perceived value and how well you can build that perception in the mind of a prospect using effective marketing. 

Testing Price Points

All the price theory in the world won't tell you what your optimum price is until you let consumers test it with their wallets.  I remember Mark Nolan, author of "The Instant Marketing Plan" once telling a story about how he sold 100,000 copies of a book on free publicity he'd written for $29 a piece.

After selling a ton of these books he had a conversation with another marketer who asked him if he had tested his price at $49.  Mark just stared at him as he realized that he'd been so busy selling his book and things we're going so well that he hadn't tested his price. 

You should consider starting your test with four price points:

1.  What you think should be the price.

2.  The highest possible price you can imagine, but one to which you think that consumers would still respond.

3.  A low price that is a great deal for the customer, but less than you want to charge.

4.  A fourth price that is outrageously high or low.

Holding everything else constant, determine the sales from each price point.  You'll probably find that the price that obtains the maximum sales and profitability is higher than what you had originally intended.

You might also consider price testing a combination offer.  By this I mean, what combination of items can I offer for the maximum sales at the highest price.  This may be more difficult in the real world but one the Internet it is simple. 

Just send one stream of prospects to a page with one combination and price and send a second set of prospects to a second page with a different combination and price.  The combination could include different products bundles, different guarantees, different service features etc.

Teeter Point and the Six Questions

Ken Evoy, coauthor of "Make Your Price Sell," an online price determination product invented the term "Teeter Point," which he has even trademarked.  The teeter point is the price at which a consumer just can't make up their mind.  It's the point at which if the price was raised a dollar you'd lose the sale and if it was dropped you win the sale.

The trick of course if find the teeter point.  Ken asks two questions to two different groups of people to find the teeter point.

Question # 1 - What price is almost too high to buy?

Question # 2 - What price is just a bit too high to buy?

If the median for question # 1 is $50 and the median for question # 2 is $45, then your teeter point is somewhere between $45 and $50.

To determine a consumer's buying habits Ken has asks two more questions.

Question # 3 - What is the price you usually spend for (product name)?

Question # 4 - How often do you buy (product name)?

This information is important because it helps you determine what a consumer might expect to pay for your product or service. 

Other questions that are asked in Ken's price survey are:

Question # 5 - On a scale from one to seven, how unique is (product name)?

Question # 6 - On a scale from one to seven, how important is (product name)?

The more unique and important your product and service, the higher the price you can attach to it. 

The last question that is asked is:

Question # 7 - What is a fair price for (product name)?

The respondent will normally answer with a price that is lower than what they truly consider fair.  However, combined with the teeter point questions, you'll have a good indication the optimum price you can charge for the most sales.

David Frey, President of Marketing Best Practices Inc., a Houston-based small business marketing consulting firm, is the senior editor of the Marketing Best Practices Newsletter featuring small business marketing best practices.