I have been building and launching products and startups for more than 20 years. In that time I’ve become somewhat of an expert on pricing, mostly due to the experience I’ve gained recovering from my own pricing mistakes.
A lot of startups don’t think about pricing much before they launch a new product to market. They do a lot of guessing, and to be fair, a lot of pricing is guesswork — it’s a soupy mix of math, science and psychology. Rarely is there a right answer beyond “sell it for more than it costs to make it,” but even that rigid rule becomes flexible when market share is a critical factor in the early days.
4 Hard Truths About Product Pricing
- Pricing is a mix of math, science and psychology.
- Lowering a price won’t necessarily save you a customer.
- Raising a price won’t necessarily save you a customer.
- Customers think more about a product’s value than its price.
While we’re at it, let’s talk about inflation — for just a second, because I know you’re probably as sick of the topic as I am. Macro market effects like inflation can influence pricing in sneaky ways. Even when your own costs don’t come under inflationary pressure, the folks who provide the things you need to do your business might find their business under inflationary pressure. The effects are transitory, but almost always temporary. Unless accompanied by some rare global catalyst, inflation appears, peaks and recedes over time.
As inflation remains persistent, I’m getting two similar-sounding but very different questions:
- Is our product priced too high?
- Is our product priced too low?
Let’s face it. Anyone who has ever been in the position of selling something has asked either or both of those questions at one point or another. That mix of math, science and psychology makes those questions so persistent and difficult to answer.
Is Our Product Priced Too High?
As the global economy continues to be dragged down by ever-increasing prices and costs, I’m hearing more and more from companies wondering if they should meet their market where it sits financially – cash constrained and cutting back. No one wants to be the product or service that a customer decides they can live without, especially if their product or service is deemed too expensive.
But here’s the thing. It’s rare that I see a price decrease save a customer or even increase their lifetime value to the company. That’s because those kinds of keep-or-ditch decisions aren’t usually made on price. What I’ve discovered is that, unless it’s the most extreme circumstances, for example an emergency that requires a customer to make deep and painful lifestyle or business changes, the decision whether to purchase or keep a product or service comes down to value.
What About Discounting Prices?
In that scenario, the math isn’t as important as the psychology. In other words, the customer will purchase or keep paying for the product or service as long as they still realize the value they expect for that price.
One one hand, think about the times you most often are offered a price break as a lever for keeping a product — analog cable and satellite television, satellite radio subscriptions, warranties, things like that. The retail price is rarely worth the diminishing value of the product, not because of an economic change on the customer side, but because new options exist to change the value prop.
So sure, you’ll stick around if they give you a 50 percent or 75 percent discount, but only for so long. That discount is never going to save that customer if the overall value of the product itself diminishes to near zero.
On the other hand, I’m a fan of discounting a product or service, but only when the discount is temporary and self-selective, like a coupon. Cost-sensitive customers might use that coupon to sweeten the value prop in tough times, while more value-sensitive customers will ignore the coupon completely, and thus won’t perceive that the value has been lowered.
Is Our Product Priced Too Low?
If it’s rare that I see a price decrease save a customer, it’s almost as rare that I see a price increase lose a customer, especially the kind of customer worth keeping.
My answer to this question is almost always “yes,” sometimes even without thinking about it, based solely on my experience that most startups tend to undervalue their product — and there’s that psychology problem again.
As a psychological issue, it’s actually not a terrible problem to have, as it’s a question that usually goes hand-in-hand with high demand and crisp business. It only becomes a concern when the math goes awry — when the margins shrink at high volume or something like inflation pushes up the cost of delivery.
The real question comes down to value again. If you’re receiving signals that your customers value your product higher than what you’re charging for it, pay attention to those signals. You can adjust your pricing to meet that demand, but keep in mind your customers will always expect more value than what they’re paying. Raise the price a little, meet that psychological value expectation, but not enough to shock the customer into deeming you too expensive.
Other problems with your pricing have little to do with the numbers themselves, for example using the wrong pricing model or tiering pricing incorrectly. I’ll get into that topic another time, because before you can tackle those problems, you should connect price to perceived value and weigh against your costs to get to your best margin.
Once you do that, the rest of it is straight math.