What should you really be charging?

A few weeks ago, I talked about testing sales approaches and other vehicles of marketing.  Today I want to talk specifically about “Price Testing.”

You should always be testing your prices.  Different prices  can often outperform one another on the same product…sometimes by enormous margins.

I have seen where $17 outperformed $25 by 300%, or $147 out-pulled $97 by a huge margin.

You might be asking yourself the question, “Why does one price out-pull another?”

There are lots of theories about that.  To be honest, I can’t say with certainty.  But here are a couple reasons…

It could be the psychological image that the customer has regarding the value of the product.  Or, it could be the perception the customer has of the quality of the product or service.

Since you are not certain about what’s going on in the customer’s guarded mind assessment, it becomes important to test you r price.  Testing helps you learn how the customer sees your product.  Without it, you could be leaving a lot of money on the table.

Every situation in price testing is different and unique.   This is why I implore you to test different prices.  You will be amazed at the difference in profit one price will produce versus another.

Testing applies to every aspect of marketing.

If you put ads in newspapers or magazines, test different approaches, different hot-button statements, different rationales, different headlines, different packages, and different prices. You get the idea.

You should make specific offers and analyze the number of responses, prospects, and the resulting sales for each ad.

Most business owners stop here.

You however, must go beyond this point and compute the cost-per-prospect, cost-per-sale, and the average profit-per-sale against the “control” you have in place.  This will reveal which one works and pulls better than the other.  The one that pulls better becomes your new control. 

Remember, an ad costs you the same amount of space or air time whether it produces 100 prospects, 1,000 prospects or 10,000 prospects.

Doesn’t it make sense therefore, that you should test different ad approaches to find those that work better than all the others…and then use those approaches to maximize your marketing investment?  Of course it does.

So, starting “Right Now”, test your pricing using the approaches and measurements I just mentioned, and let me know the results you get.


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12 Responses to “What should you really be charging?”

  1. Lisa Raymond says:

    I am particularly drawn to the idea of testing the price against the prospect/sale to see how much profit was made. I would have been the person stopping at computing based on the service or product I sold. This reminder may also serve to help point out a potentially new target market. Thanks for the post!

    [Reply]

    Ken Varga Reply:

    @Lisa Raymond,
    Lisa, I’m glad you see the potential.

    [Reply]

  2. K.S.Bagga says:

    Ken, Outperformance and subsequent analyses is once you have set the price. what factors to keep in mind to initialy put the price on the product?

    second: how does a customer cope with getting to know different prices for the same products(apart from the “sale” which again defeats the exercise). doesnt that leave a bad taste in the customers mind.?

    [Reply]

    Ken Varga Reply:

    @K.S.Bagga,
    Hi K.S.,

    Setting you initial price on a product is an involved subject. But, most importantly it involves what your research shows your target market will be willing to pay. One strategy is to design your product or service around that price and then add extra value to stand out. Another, of course, is to provide the same value your competitors are providing but at a much lesser price. And yet another is to target the high end of the market.

    Those are the basic pricing strategies. But the strategies can get more radical. For instance, much of the tech industry has been following what I would call the “loss-leader” strategy.

    As an example, companies like Epson or Hewlett Packard will sell you their printers at a low price and charge you a lot for the ink afterward. They know that the average buyer will keep the printer for a certain amount of time and will buy a certain amount of ink. Because they understand the lifetime value of their customer, they know how low they can price the printer to create a stream of income.

    In this case, what they are selling is the ink; the printer is just the front end to capture the buyer as an ink customer.

    Regarding how the customer will respond to different prices, you’ll need to take into account your particular situation and adjust accordingly.

    For instance, let’s take the example of Epson and the printers. What Epson will do is run sales at different prices. So one month they may sell the printer at $89. Another month they’ll sell it for $99; and so on. Then they’ll see what price gets them the most customers, because that’s what they are really interested in…ink customers.

    So look at what you are trying to accomplish and set up your test accordingly. If done properly, no one should be upset. But the place to start is with knowing what the lifetime value of your average customer will be. You can find out more about calculating lifetime customer value here: http://www.kenvarga.com/lifetime_value_of_customer.html

    [Reply]

  3. K.S.Bagga says:

    Ken,
    Thanks for the insight. Since we are in touch with your discussion at Guerrilla Marketing also, will send some info about my experiences.

    Khushwinder Bagga

    [Reply]

    Ken Varga Reply:

    @K.S.Bagga,
    Ok, K.S.

    [Reply]

  4. In a race to the bottom, price matters a lot. When suppliers try to underbid one another, for instance. Or when generics try to compete with brand names.

    But in the world of differentiation, price shouldn’t be a key driver, imho. Rather, price should be tested and retested and retested, until optimized (for an established period of time). One method of optimization I’ve witnessed was to pair a target product with other far less developed or slightly more developed products, and setting prices in ways that make the target product the obvious “best choice”. At least, this works in the online space (and can be measured extremely well).

    All the best,

    Glenn

    [Reply]

    Ken Varga Reply:

    @Glenn Friesen,
    Hi Glenn, I agree. Testing and retesting is the way to optimize pricing.

    Ken

    [Reply]

  5. May says:

    Thanks for a great article. It seems that the perceived value of the product is a key factor to the price point. Consumers would pay more for certain items if they feels that one company offers a better product or something else of higher perceived value like more quantitiy, features, status, performance, customer service, etc. It is also easier to set higher prices when you have existing brand loyalty or a high market share. For the rest, pricing needs to meet or exceeds its perceived value to compete.

    [Reply]

    Ken Varga Reply:

    @May,
    Hi May, in your last sentence, I think you meant to say that the perceived value needs to exceed the price rather than that pricing needs to exceed… Yes, that’s the key to selling more products or services. The buyer must perceive that they are getting equal or better value. The greater the value gap is in their favor, the faster they will buy.

    Ken

    [Reply]

    May Reply:

    @Ken Varga, thanks for the catch. Yes, I meant the perceived value needs to exceed the pricing!

    [Reply]

    Ken Varga Reply:

    @May,

    Hi May, you are welcome!

    Ken

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