One of the hardest things in business is to work out what price to charge for your product or service. Pricing a premium product is even harder.
Too high and you risk losing sales to competitors offering something (at least in your customer’s eyes) seen as similar, but cheaper. On the other hand underpricing not only fixes its perceived value position at a low level (making it nigh-on impossible to raise prices later). It means having to shift a ton more to make the same profit, and puts you in danger of racing to the bottom.
Over the past 12 years we’ve worked with over 300 businesses from all over the world. When they first came to us, many of them priced their products inconsistent with customer expectations. Out of those, the vast majority – maybe around 80% – went with pricing lower than it needed to be.
So why do most businesses charge too little?
Sure, over time innovative products tend to decrease in price. For example, I remember when VHS recorders and DVD players were over $1,000, while today you half expect them inside a Christmas cracker. Increasing globalization, manufacturing scale and automation – and of course increased competition – means we as consumers are the winners.
If you’re making what customers see as being a ‘me-too’ product, then you’re pricing is pretty much dictated by the prevailing marketing conditions. If the competition are selling their MP3 players for $200, it may be tough to sell yours for $300 or more.
But did you know Sony makes a Walkman music player that sells for more than $3,000? Of course the Sony model doesn’t seek to compete with players costing $200 – that would be ridiculous. But if you’re an audiophile looking for one of the best portable music players around, the Sony enjoys a strong market position.
Apple’s latest Mac Pro computer, fully spec’ed out, costs more than a Tesla Cybertruck. Is the Mac Pro designed for people who use computers for sending email, making spreadsheets, or surfing the web? Far from it. Apple are aiming their machine at high-end graphics, animation, and video editing professionals. If that’s you, maybe the productivity and legacy software compatibility of the Mac Pro justifies its price.
Sony and Apple aren’t looking to compete with existing products at a particular price point. They’re justifying pricing through the delivery of quality and performance for small but lucrative product niche. Their clearly-defined product differentiation allows them to charge a premium.
Of course, most of us aren’t premium brands like Apple or Sony. Yet startups and small businesses invariably set pricing lower than customers are willing to pay.
For a company with no track record, market share, or industry recognition, pricing is often set low. The rationale is to quickly enter a market category and build a large customer base. New brands will often underprice their products due to conflating pricing with value.
The problem with both situations isn’t just that fact of leaving money on the table. It’s that business growth is made that much more difficult – or even impossible – based on the profit margins made on each sale. If your sole growth tactic is to sell cheaper than established brands, you’re commoditizing your value. Ultimately, you’re setting your business on a downward spiral. That’s a race you don’t want to win.
Unless you’re selling a commodity, the overwhelming driver for your pricing is confidence. Selling cheap implies you don’t believe you can charge more for your product because you don’t think it’s good enough. You don’t think you can increase pricing because you’re afraid they won’t pay more, even if yours is of higher quality or perceived value.
But what you’re forgetting is the brand perception you’re sending to the market by pricing lower. You’re conveying the impression your product isn’t worth more.
A common mistake is pricing a product based upon what it costs to make. Firstly, such thinking presupposes people are actually willing to pay that price.
It also restricts product development and innovation since you’re focused on the fixed costs of manufacturing, rather than on customer value. Having said that, “cost-plus-X%” pricing does have a place in that it shows your minimum price floor. Such data is helpful for bulk purchasing situations, or calculating margins for distributors or resellers.
From a manufacturing perspective, the price/benefit ratio analysis should really begin at the product development stage. Not only does market research and product pricing analysis provide insights as to what point a product becomes too expensive to make. It can also be used to direct development, highlighting attributes and features customers are most willing to pay for.
What makes a product “premium”? Pricing something higher isn’t just about its cost to buy. It’s not even solely about the perceived value element. It’s about the whole customer buying experience before, during, and after the transaction.
For an effective premium product pricing strategy, customer expectations need to exceed whatever yardstick being used as measurement. Your product needs to justify its premium pricing not just in terms of function, features, and form.
It should exceed expectations in terms of all those imperceptible details that, together, elevate a premium-tier product to a level seen as justifiable.
What kind of details? Details like starched napkins.
Part of the theater when eating at a fine dining restaurant are the crisp, white starched napkins on each table. It’s when you notice how each glass has been polished to within an inch of its life.
Or how the cutlery is positioned just so, and that the menus have been freshly printed on quality paper.
Does all of this attention to detail make the food taste better? Of course not. But when you’re paying for a fine dining experience, it’s what’s expected.
It’s the same reason why expensive shoes come with fabric bags to protect them. Or how some mechanical watches have glass backs so you can see the movement.
Those small details matter. Those details reassure your customer they’ve made the right choice. The price is aligned with the value delivered. It helps reinforce the notion yours is a premium brand.
A premium product includes your marketing strategy, branding, and customer service. It’s about the quality of your advertising, how your website looks, and how someone answers the phone. It’s about being on time to meetings, what your PowerPoint deck looks like, and the last time your delivery van was washed. Such fine points help set your business apart.
Sure, these are all details that don’t directly influence the quality of your product offering.
Except, of course, they do.
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