Lately I’ve been spending some time with local entrepreneurs who are looking for business advice. Inevitably, the topic of pricing comes up. “How do I know how much to charge?”
There are lots of answers.
You can make up a number and see if it works. You can test a few different prices at the same time. You can do traditional market research and see what you find. You can read pricing books and academic papers on pricing approaches, techniques, and behavioral psychology. You can see what others are charging.
The good news about pricing is that you can guess, be wrong, but still be right enough to build a great sustainable business. Maybe you’re leaving some money on the table, but, like my dad always says, no one ever went broke making a profit.
However, you are not allowed to ask people:
- “What would you pay for this?”
- “Would you buy this for $20?”
- “How much do you think this is worth?”
- “What’s the most you’d pay?”
And these are the questions I hear people asking over and over. You can’t ask people who haven’t paid how much they’re willing to pay. Their answers don’t matter because there’s no cost to saying “yes” ”$20” “no” ”$100”. They all cost the same – nothing.
The only answers that matter are dollars spent. People answer when they pay for something. That’s the only answer that really matters.
So put a price on it and put it up for sale. If people buy that’s a yes. Change the price. If people buy, that’s a yes. If people stop buying, that’s a no. Crude? Maybe. But it’s real.
You can dig into the why’s more deeply over time, but you have to start somewhere. And the best place to start is with real answers. This is why we picked $10 for a Basecamp Breeze email address.
Dmitry
on 10 Jan 13Does this mean that given good sales of Breeze, the price will go up?
Sandra Persing
on 10 Jan 13Know your product, know its worth, share your knowledge and receive feedback? Goes against lots that been drilled during my marketing MBA classes…Thank goodness I spent more time having fun than attending classes, then…
Jeff Cronin
on 10 Jan 13For solutions to business problems you need to understand the cost of the process you are replacing (if any) the new money they will get for using you and the cost of doing nothing. Charge a little less than that if you can afford to sell to them with a solid sales process and charge a lot less if they have to buy without your help.
You them have to check to see if you can profit at that price. Hopefully you did this before you started building so you have some solid constraints for your build process.
Gideon Greenspan
on 10 Jan 13I’ve had excellent results asking people what they would pay. The key is to do it before the product (or its premium version) exists. Then they are likely to give you a realistic (i.e. not lowball) price because they want you to be motivated to create the thing they need. Collect a few thousand responses with corresponding desired capacities/feature sets, run a clustering algorithm (e.g. Bayesian), and you’ll come out with a pretty good set of priced service levels (along with one or two silly ones that you can ignore).
Patrick Campbell
on 10 Jan 13There’s a big difference between asking vs. not asking and asking correctly vs. asking incorrectly.
You’re completely right. The only true validation to your price is whether or not someone puts down their credit card numbers and hits submit. Yet, before just putting a number on the page, you can cull price sensitivity data through customer data/questions that help guide that number on the page. It’s all about how you ask and what data you use.
That being said, the biggest lesson from this article I whole-heartedly agree with is the notion that, “pricing is a process.” You can’t just throw some numbers on a page and never change them. Instead, pricing, and more poignantly value, needs to be a core competency of your quantifiable marketing team.
More at our value based pricing blog
Anonymous Coward
on 10 Jan 13Jason,
For example and more specifically – why did you start your pricing of Basecamp Breeze at $10 instead of $100? Do you think either would have been just as good? If not, then the “why not” to that question is really what people are asking you when they ask “how much should I charge?”. Why did you pick $10 instead of say $100, or $50, or $x?
Jack Dempsey
on 10 Jan 13Thanks for the piece Jason. I see a lot of discussion on what to charge, but not often how to structure the payment terms: all features to all people, charge for # of seats vs pay per level of membership (which gets you more features/space/etc) vs a la carte (each main component is $x a month).
Any resources you’ve find useful for that part of the pricing problem?
Anonymous
on 11 Jan 13Pricing involves complex strategies and analysis. There is a company which can help you with this, called Retalon. Please check out their website, www.retalon.com and use the webpage to contact them, if you are involved in the business of retail.
Jesse Creel
on 11 Jan 13This is true unless the folks have already purchased. In that case asking them what they would pay should be encouraged and is a good way to make sure your overdelievering. Here’s a great place to get started on building a foundation that will support that kind of sustainable business model: http://goo.gl/XKbq8
Anonymous Coward
on 11 Jan 13While this strategy may work for a large franchise that has a database and an endless source for an item they are selling… it does no good at all a pricing an item if you are an individual who has just one single item to sell and that’s that.
In which case, your strategy is to price too high, and then over time lower it by bits and bits until someone finally bites. Assuming you have an endless ocean of lookers and and endless amount of time. If you have neither one or the other, this strategy also will not work.
Then you have to try an auction, where you price too low, or where you think you will definitely get a bite, then invite other bidders to outbid that price.
Douglas
on 11 Jan 13Hi, Jason Contextual pricing ( http://preview.tinyurl.com/bghn3b2 ) and reviewed here ( http://preview.tinyurl.com/be8p898 ) is well-worth a read. The purchaser’s frame of reference is important, so to avoid excessive trial and error I determining the best price. Best wishes
Curious
on 11 Jan 13Just a small digression – do you think (and why) it’s alright for agencies (mostly web dev/design) to put a thing like Choose your budget in the project questionnaire?
For example: Your budget: [ ] $2,000 – $5,000 [ ] $5,000 – $10,000 [ ] $10,000 – $20,000 [ ] over $20,000
Edd Pouster
on 11 Jan 13Greetings, Jason nice blogpost, thx. Start to experimenting with prices after reading becouse store purchases are too low. For exemple can you tell me how much you can pay for this software, tnx.
Tom H
on 11 Jan 13One thing, especially for SaaS businesses. With active subscribers, you can’t keep putting up and down the price every month to find the sweet spot. How do you recommend dealing with pricing for these sorts of models?
Daniel
on 11 Jan 13I’m really impressed with your posts. Every time I read them is like “wait, ho told him about my needs?”.
Thank you very much for your time, thoughts, and experience, its refreshing!
Derek Hecksher
on 11 Jan 13I suppose that somewhere above break-even is good… right?
Kyle A
on 11 Jan 13Beyond being profitable, you can often price things as a loss leader just to get people ‘in the door’ and in your marketing channels so that you can sell them other things.
I haven’t signed up for breeze, but let me run through a hypothetical situation using Breeze as an example. Each ‘list’ earns 37s $10. The average list contains 25 email addresses. Depending on the nature of their privacy policy, 37s might be able to communicate with those 25 people directly for new product launches etc—but likely not. At very least (if they’re smart) every email sent to those 25 people will contain a footer saying ‘Powered by Basecamp Breeze’ with a link. Now 37s is getting paid to add prospects to their marketing channel. In cases like this there might be more long term value in the entire channel, than the direct revenue from Breeze so a very low price is preferred. F’n brilliant if you ask me.
Chris Hopf (PricingWire)
on 11 Jan 13Five quick thoughts to carefully keep in mind: — 1. It’s not the price they don’t like, but what they understand they are (or are not) getting for that price. — 2. Indeed, there is a whole lot you can only learn from paying customers. — 3. Getting your value offerings and messaging right . . is the first step to getting your pricing right. — 4. When you help them understand your value, you also help them understand your pricing. — 5. KNOWING YOUR CUSTOMERS BETTER should be one of your competitive advantages.
Ashada
on 14 Jan 13That’s great post. Good job JF.
Drazen Mokić
on 14 Jan 13How would you bump a price up if the price you are currently selling at is working with a monthly subscription plan? Would you just raise it for new customers or not raise it at all?
Anna
on 15 Jan 13I initially tried this sort of a pricing strategy and ran into a rather uncomfortable problem of “why did so-and-so pay $x and I am being charged $X?”. I think in this instance a bit of legwork and thought ahead of time is better than the trial by credit card.
Jason Fried
on 16 Jan 13How would you bump a price up if the price you are currently selling at is working with a monthly subscription plan? Would you just raise it for new customers or not raise it at all?
You can always grandfather current customers into the price they were paying and just charge new customers the higher price. Or you could give current customers 6 months on the old prices and then switch to the new. It all comes down to communicating clearly and setting clear expectations.
This discussion is closed.