With your brand values and objectives in mind, you’ll now understand your goals and have the foundation to determine how to proceed with pricing:
- If growth is a priority, you may be more comfortable with a lower starting price to reduce friction.
- If profitability or quality is a priority, you may opt for a different approach.
Quick reminder, there’s no need to reinvent the wheel every time. Many founders have a natural inclination for innovation. If you’ve already crafted a groundbreaking and novel solution, you don’t have to recreate every aspect around it. Certainly, customization is required as different situations, solutions, and markets demand a unique approach. However, begin with what’s tried and true, then experiment and adapt as needed. Here are 4 key activities that will give you a frame of reference for your pricing:
1) Mystery Shop
Use mystery shopping to better understand and emulate your competitors (direct or indirect).
SkiClaws, a company in Whitehorse, Canada, has designed an innovative attachment that interfaces between your bindings and ski. It enables skiers to ascend slopes without needing to remove their skis or use the tiring herringbone technique (which doesn’t work well for steep, icy, or narrow slopes).
As an innovative solution, they don’t have any direct competitors. However, there are alternative indirect competitors like ski skins, crampons, or even snowshoes. They all compete similarly for a skier’s accessory budget. While working with Doug, I recommended he use these products as benchmarks for pricing. If he priced SkiClaws too low, even if production costs were significantly lower, it might be perceived as an inferior or low-quality product. On the other hand, pricing it too high could create adoption barriers.
If the idea of increasing pricing despite low costs, just for the sake of increasing adoption, makes you uncomfortable, consider the following:
- The additional revenue could be reinvested to further improve your offerings, scale your organization, or even provide you with an opportunity to give back or amplify your impact if you’re already doing so.
- You might be underpricing to begin with. Yes, if you sell more, economies of scale will bring down production costs. However, this might not be the same for operational costs at scale, which you might not have accounted for when coming up with your original pricing.
For another example, listen to episode 122 of the Masters of Scale podcast with Reid Hoffman, the founder of LinkedIn, to hear Warby Parker, the online eyewear retailer, discussing their need to adjust their pricing to meet market expectations set by industry incumbents.
2) Learn From Your Customers
Customer Discovery never ends; it’s not only something you do for product design and market validation. Now is a good time to revisit customers or approach prospects to gauge their sentiment on different price points.
What is acceptable?
What is expensive?
What is outrageous?
Again, keep your brand values in mind, e.g. if your solution is designed for a premium or exclusive market, you may want to start with an outrageous price point, even if it would alienate general consumers. They’re not your early adopters or target market anyway, so it’s fine!
3) Understand their default expectation
Not only the price point, but you’ll also want to understand their preferred payment method. Do they typically pay by the hour, a percentage of the transaction, a flat fee, in installments, or only upon receiving the product or project completion? To reduce friction, start with what they’re familiar with.
4) Cost-based vs. Value-based Pricing.
Many companies follow this practice, but it’s important not to base your pricing solely on your Cost of Goods Sold (COGS). This also applies to service providers (hourly rate is a common cost-based approach). Costs may not always align proportionally with volume. Instead, consider how you can quantify the value you provide and price accordingly.
How then, do we quantify value? First, you need to understand the impact of your solution:
How much money are you saving them?
You can likely charge 10% – 15% of their annual savings.
How much money are you helping them make?
You can likely charge 10% – 25% of the expected additional monthly income you’re helping them make.
How much time are you saving them by solving their problem?
A little more complicated, start by identifying how much time you’re saving them, then estimate what their time is worth or the opportunity cost associated with what they could be doing instead. You can charge around 10% of their missed opportunity cost per month.
To illustrate this point, let’s take a look at Green Chair Recycling, a social enterprise that provides recycling bins and volunteers for events like music festivals and large conferences to sort their recyclables. When I had the opportunity to work with them, they were generating quotes based on their costs for servicing an event.
For example, if they were asked to cover a 3-hour event with 100 attendees, it would require them to have 3 employees present for 3 hours, and they would charge $540 (3 x $60/hr x 3hrs). If they were requested for a 3-hour event with 500 attendees (five times more), they would need 6 employees for the same duration (only twice as many), and they would charge $1080 (6 x $60/hr x 3hrs). Their rate is made up here, but it illustrates the point.
The number of staff required was not proportionate to the scale of the event and was primarily dependent on the size of the venue and the duration of it. Instead of pricing based on the cost of operations, I encouraged Liliana to adjust their pricing to align with the “volume” of attendees. This approach would enable them to charge more, as organizers were willing to pay higher rates due to increased revenue from more ticket sales. This change enabled them to increase their margins and become more financially sustainable. The additional profit would allow them to amplify their impact through their recycling training programs and initiatives.
Another similar example is Integrate Play Solutions, which serves companies by offering experiential workshops that promote team communication, collaboration, and innovation through play, using Lego! Kirsten considered various factors such as the number of participants, the complexity of the workshops, duration, and even the potential for future work when designing quotes for clients. However, these were all primarily cost-oriented considerations. One day, she received an inquiry from a multinational video game company to run a workshop for them. A large company like them can and is willing to pay a lot more than the smaller clients she was used to working with.
What would you do in her situation?
Would you continue to charge the same rate based on costs?
If not, how else might you justify pricing for a premium client?
You could decide to keep pricing as-is to secure a reputable client to help build your reputation and attract more prospects. However, recognize it’ll be difficult to increase pricing with them in the future if you’ve underpriced to begin with. Alternatively, you could decide to increase pricing to reflect the value and impact you’re able to create in a larger organization. There is no right or wrong answer, but your choices should be made with strategic intent.
In any case, I’m not advocating for price gouging. Instead, I’m suggesting pricing that will grow in proportion to the success of your customers. This will allow you to better scale your impact without feeling like you’re constantly scraping the bottom of the barrel. A higher price also doesn’t equate to making your offering less accessible. The extra profit from more successful clients could be applied toward subsidizing the cost of working with earlier-stage, less profitable, or underserved prospects that you want to support but otherwise find difficult to justify financially.
Identity as a form of Value
There is one category where I can’t imagine value-based pricing being possible: offerings that satisfy a desire instead of solving a problem. Games, entertainment, fashion, and snacks are some examples. If your offering falls under this category, activities 1, 2, and 3 above should still help. The closest comparison to “value” for these offerings would be the sense of identity people seek to associate themselves with through the proxy of your brand. Pricing is simply one of the many components that reflect and inform that identity.
To elaborate, let’s look at VGreen, a company in Vietnam that brews and sells various kombucha products in a wide variety of flavors. They’ve priced competitively in the market to match coffee shops, teahouses, and bubble tea stores. Effectively (though perhaps unwillingly) positioning themselves as a casual beverage option. They struggled with low margins due to the higher production costs associated with kombucha fermentation, and the local market was unfamiliar with the product and its health benefits.
I encouraged them to consider pricing for a more specific target market to strengthen their brand positioning. For example, targeting yoginis and professional women, or positioning themselves as a non-alcoholic alternative for social events. This approach would align their pricing and branding more closely with beer: not about letting loose or socializing, but rather as a carefully crafted and fermented product.
Even if their goal is to popularize kombucha as an everyday drink, beginning with a higher-end market isn’t restrictive. Apple provides a parallel example. They defined a clear target customer: the creatives, the visionaries, and those unwilling to settle for the status quo. In doing so, they didn’t alienate those who don’t fit that mold; instead, they offered a clear persona to aspire to.
Selling diamonds is another example. It’s just a piece of rock; where’s the value in that? Yet we purchase them at a high price because:
- It’s become a love symbol, communicating our commitment to another (no thanks to some clever marketing by De Beers. Tune in to Episode #30 of the Empire Builders Podcast to hear about this in detail).
- It’s a status symbol, communicating our identity as someone who is well-off. Though men say it’s for their women, men are the ones who buy and are willing to spend on it because it speaks to their identity as someone wealthy enough to splurge on such luxurious items and who values their partner enough to do so.
Is your solution an Investment or a Cost?
To take it a step further, consider pricing not only from the perspective of your cost (operational) vs. the value you create for your customers’. But also explore ways you can tie your solution to increasing your customers’ value (revenue) instead of cost (being an expense for improvement). In Episode #10 of The Empire Builders Podcast, Steve and Dave discuss JD Power’s transformation. JD Power started as a company that provided customer survey data to automakers. However, they pivoted into positioning their surveys as rankings which assisted automakers in increasing sales. By doing so, their surveys shifted from being costs for data collection to a marketing investment which would generate more revenue for automakers.