This week the blog takes a slightly new direction. For the first time there’s a subject which I think is so detailed – and so important – that I’m splitting it over two weeks, hopefully with a good dose of your feedback in between weeks one and two. The subject of what will effectively be a 1,200 word ‘special report’ as opposed to a blog post is simple – pricing.
If you’re running a business – especially a service – ‘how much should I charge’ is a perennial question. Too low and you miss out on profits; too high and you miss out on sales.
But how do you settle on what to charge? And with more and more products and services being sold online, does modern research on pricing shed any new light on the subject?
This week I’m going to have a look at some long accepted wisdom – and some of the new research that’s been done on pricing. Next week I’ll bring it closer to home – just what should you charge for your product or service? And how do you make sure that you’re correctly positioned in the marketplace?
Probably the one thing that everyone knows about pricing is the “power of 9.” Why do we constantly see goods marked at £1.99, subscriptions at $19 a month and even houses for sale at £199,950? We all know that there’s virtually no difference between those prices and £2, $20 or £200,000.
So why, when I was selling wine for Diageo, did I have such a battle – so often – with Threshers off-licence chain? Every time there was a budget we’d have an argument about the extra 4p duty that had been imposed on a bottle of wine. Was I going to take the hit or were they? Because one way or another that bottle of wine was going to stay on sale at £4.99. Sell it at £5.03? You must be mad. Sales would have plummeted.
Here’s an interesting study that was done in the USA. An identical product was put into three separate catalogues and sent to three demographically-identical audiences. In one catalogue it was priced at $34. In another it was priced at $39 and then $44 in the last one. More sales were made at $39 than either of the other two prices.
Remember too that price isn’t just about the product. After all, a bottle of San Miguel is a bottle of San Miguel. It doesn’t matter whether you buy it from your local corner shop or from a trendy café bar in the centre of Leeds – it’s still San Miguel.
Now obviously, I know that the café bar in central Leeds has far higher overheads than the corner shop, so I should expect to pay more for my beer. But why is it that people will still pay more for a beer from an upmarket hotel, even when the beer is going to be drunk on a Spanish beach, and even when there’s a cheaper alternative thanks to the kiosk across the road?
Price isn’t just about product: price is about perception as well.
After all, how did Starbucks build a business selling coffee for $3 when everyone else had been selling it for $1? Because you weren’t buying a coffee any more – you were buying a Caramel Macchiato with a double shot.
Nothing is cheap or expensive by itself: everything is relative – to the competition, to the benefit your customer will get from it and (as Starbucks showed) to the perception of the product.
I’d welcome your views on all aspects of pricing, but let me leave you with one question: can your product or service be too cheap? After all, as Sybil Fawlty constantly reminds us, “Why is it cheap? Because it’s no good.”
If you’re selling an hour’s consultancy for $49 can it possibly be any good? Some people on the internet are charging – and getting – $1,000 an hour. Maybe the guy at $450 looks like good value in comparison. But $49? Does he know anything at all?
With that, I’ll look forward to your views and be back with part II next week.