Determining Price and Price Sensitivity
Pricing your products appropriately is critical to optimizing lifetime value and attracting the right customers. Price says a lot more about your brand than just the cost. Price is how you position yourself in the marketplace. Price is the value of the product to the consumer. It’s imperative that you have a scientific process behind your pricing. If you’re just shooting from the hip, your price will fail your product and if you shoot low, it’s hard to justify price jumps to existing customers.
I have a process that I want to share that has been extremely helpful for figuring out product pricing for OptiMind. It is not perfect but it’s a good start.
This post is how we choose to initially price products. Future posts will talk about initial pricing vs. lifetime value pricing optimization so keep an eye out for those.
Let’s touch on the psychology that goes into pricing a product first. There is a well-known study showing that numbers such as $39.99 elicit a better consumer response than $40.00. The idea is that the lower the first dollar number is, the less expensive it’s perceived by the consumer even though it’s only a penny difference. This has to do with priming. The same prime can be applied to dates where 1999 at first glance gives a more archaic vibe than 2000 does.
I have a personal association with prices ending in 99¢ and 95¢ though. They remind me of Wal-Mart and Target-like stores of the world. Those prices feel disingenuous to me even though they work.
When we priced OptiMind, we let consumers tell us the perceived value in prices for optimal sales and revenue. Price should not be created from cost. Price should be created from value.
The first thing that you need to do is determine the minimum selling price for your product. It’s different for every business and every product. Consider the bare costs to run your business and produce your product profitably. Next, determine the maximum reasonable price that you’d buy your product for. Think about what you already spend on similar products.
Now it’s time to look at comparable products currently on the market to get a baseline idea. Don’t just look at direct competition though. You need to also examine secondary competition. With OptiMind, we considered coffee in our pricing strategy, not just other nootropics and supplements.
With that baseline, think about what position you want to be in. How much value does your product bring in comparison? Some of this pricing strategy is intuitive. Ask yourself, am I creating a better product than them? Is it perceived as a better product?
If you want to get quantitative about it, you can map out the bell curve of market prices with standard deviations. Set specific market positions for yourself and of your competitors.
Once you have the maximum and minimum prices, you’re going to choose five prices in that range.
Costumer Price Sensitivity
When picking the prices to test, we used a specific pricing strategy. Specific pricing involves choosing an exact price like $43.31. Notice that $43.31 is highly specific whereas a price like $43.00 is not. Essentially, you want the number to reflect the thoughtfulness and built-in logic that went into choosing the number. This exact number signifies a fairly calculated price. When we priced OptiMind, we also combined specific pricing with a gut-bias theory on odd numbers. Here are the rules for picking the prices:
- Only odd numbers in the decimal places
- No 9’s
- Choose specific numbers
- Make the numbers look and feel “pretty”
Perceived Value of a Product
Google Consumer Surveys is a great service that I have written about before. For $50, you can ask 500 people anything. Once you have 5 prices to test the market with, you can launch 5 different surveys and find out which price people will go for most often. Here’s one of our surveys:
We gave everyone the same brief description of our product and then asked if they’d buy it for X amount. Each survey said the exact same thing, but we changed the price to test consumer sensitivity.
While looking at the survey, consider who your target buyer is and play with the sidebar that contains the demographic information. You can toggle between age ranges, sex, income, and more. This can be enormously powerful. Keep in mind who the actual buyer of your product will be and not just your targeted consumer.
For example, if the product is likely to be purchased as a gift, the end consumer will not be making the purchase. The sex or age of the buyer may differ than the targeted consumer. With OptiMind, our product goes straight to the consumer, as opposed to being sold in retail stores, so we knew exactly what they were willing to pay based on the survey.
At this point, you can calculate which of the best-surveyed price points will increase your profits the most.
Here’s the spreadsheet file where you can input your own results to see the percentage change in terms of revenue. With the change in revenue, you can calculate the affect on your business’ profits.
If you want to optimize a product’s price, then you need to ask the people who will be buying it. This is fundamental. You need to test consumer price sensitivity for an equilibrium price. If the percent increase in price is less than the percent decrease in demand, then you should raise the price. Yet, this is only true up to the point of profit maximization because, in the real world, expenses change based on quantity and scale.
The Golden Rule in Pricing Strategy
The age-old tale that you can never raise your price, but you can always lower it is completely true. Raising prices has ruined businesses. That’s why it’s the foundation for this golden rule: When in doubt, go with the higher price.
Tools for Pricing
- Google Consumer Survey – online survey allowing for market testing with specific demographic information ($50 for 500 people).
- Spreadsheet – calculate change in revenue based on responses to price survey.
This is my recommendation based on my own experience. Feel free to leave your comments below to discuss your own experiences. However, if you’re trolling without constructive criticism, then please kindly go to Reddit.
Note: The information in this article is specific to fist time purchase intent pricing. This is completely different from lifetime value pricing. Just because a customer buys the product one time at a certain price, that doesn’t mean he or she will continue buying it at that price over a lifetime. I will share my experience with lifetime pricing later.