Think about your price

When people buy something, they look at the price. And they often think long and hard about the price. Therefore, the price that you charge matters in most cases.

But sometimes price doesn’t matter, so you have to take this rule with a grain of salt. Some things actually sell better if you raise the price. Many fashion labels work this way. Sometimes it works for consultants. It certainly works for Lamborghini, Ferrari and Porsche. Here’s a fun fact about Porsche:

[Porsche] posted an operating profit of 3.9 billion euros ($4.1 billion), up 14 percent from 2015. Put those numbers together and it’s on pace to net about $17,250 a car, up 9 percent. In short, every time Porsche sells a 911 sports car or one of its Cayenne SUVs, it could take the profit alone and go buy a brand new Chevy Cruze [ref]

Sometimes people will pay what seem to be irrational prices. Starbucks comes to mind. 5-hour energy too. It probably costs a dime to produce a bottle of 5-hour energy. But it often sells for $3 in a convenience store. Popcorn in a movie theater or at a fair is another example – it costs practically nothing to make popcorn, but then a movie theater charges $5 for it, and people pay it. If you can get in on a gravy train like this, more power to you. Charge what the market will bear.

But, generally speaking, if you can beat the price that people “have in their heads”, or that they are used to paying, it is often a win. A no-brainer price can be important for some products. And many a product has died because it could not be brought to market for a price that people were willing to pay. The Segway comes to mind. At the time of its first release, a Segway was something like $5,000. Few people were willing to pay that much for a glorified scooter. The price of a Segway was ridiculous for most people, and the price really hampered the product’s reach.

I can give you an example. My wife had a problem with her computer in a certain room of the house. Her computer could not connect to wifi from that room. Solution: I need to buy her a wifi extender. In my head the price was going to be $50 or $75. But I went on Google and found a list of the five best wifi extenders. I went to Amazon to look up the first one and it was $24 and had like 6,000 ratings (4.5 average). This was a complete no-brainer price because it beat the price in my head. One-click ordering, arrived the same day (on a Sunday!), installed in 10 minutes and it has worked great. If only all of life could be this easy! But that is also an example of a no-brainer price. It “beat the price in my head” by a lot, and so I bought it instantly.

This, by the way, is the whole reason why sales exist, as in “25% Off Sale, Today Only!” A sale brings the price down and therefore makes the product more palatable. Sales work because price matters.

Here is another fun fact about price: any price above “free” creates a barrier. Often a significant barrier. I have a book on Amazon called Manna. Amazon gives me a few days a year where I can set the price to “free”. Otherwise I have the price set to 99 cents – the lowest price Amazon allows. On a free day, thousands of copies of Manna get downloaded. When the price is 99 cents, I might sell 20 copies a day. Even a price as low as 99 cents creates a significant barrier, because people tend to be remarkably reluctant to “open up their wallets” and pay money. Even tiny amounts of money.

The whole idea of “door buster prices” on certain items is to try to get people into a store and agree to buy something. Then the psychology of this idea is, “once a person has opened their wallet for the one door-buster product, they will be be less reluctant to spend money on a second item.” It works. This is also the basis for the common practice known as “upselling” – if a person has made a decision to buy, they have already cleared a huge hurdle, so why not try to sell more to them?

The freemium model is powerful for a company like Dropbox or Trello because a price of “free” increases uptake dramatically. By making some part of an app or a web site free, it encourages people to arrive and try the product. Then, later, a price can be introduced. If there is a price on an app – even as low as 99 cents – it can act as a huge barrier to uptake. A freemium pricing model sometimes solves this problem (it does not work if none of the free customers ever convert to paying customers).

So think about your price. You need to charge enough to cover ALL of the costs of your business, plus a profit, or you are going to go out of business. If the market supports a profitable price – if people are willing to pay the price you set in sufficient numbers – your product can work. See also these ideas about creative revenue models.