Is there such a thing as perfect pricing?
If you are an entrepreneur like me, then likely you have wrestled over pricing. How can I price my product or service so that it is received well, valued, and provides a profit?
What happens if I price my product too low?
What if I price it too high?
How can I, like Goldilocks, find that perfect sweet spot that is “just right?”
That’s what we’re talking about today as we discuss all things about pricing: perceptions, possibilities and profitability.
Here’s my 3-question series for finding that perfect price:
First of all, you need to know that pricing is relative. It’s based on value (both perceived value and cost of materials value) as well as profitability. You can price something any way you want, but that doesn’t mean it will sell. You need to ask yourself some searching questions, such as:
- What is my competition doing? There was a time when people thought that you couldn’t price bread over $2 (taking inflation out of the equation). Then bold, young companies started adding seeds and nuts, stoneground flour, organic ingredients, a story, and an edgy brand and voila! premium-priced bread. Their bread was priced many times higher than their competitors who had been churning out bread for decades. And not only did their bread sell, but they were able to take a boring commodity and make it desirable again.
- What is my ideal customer willing to spend? You need to know who your ideal customer is so that you can price accordingly. If your ideal customer is living paycheck to paycheck, then you’ll want to keep your price on the low end. However, if your ideal customer is affluent, then you have more room to provide greater value at a higher price point. In fact, you will lose some customers if you price your product or service too low because it will appear cheap in value. Some buyers just prefer to shop at Jimmy Choo than Payless Shoe Source.
- Will I make a profit? Finally, if you cannot make a profit, then the whole effort is fruitless, (unless your product or service is a loss leader, a cheap “top of funnel” product to woo buyers in the door but not intended to make a profit, like dollar lotions at Bed, Bath and Beyond). There are actual formulas available for pricing your product that will afford you a greater chance for bringing in a profit.
In the book publishing industry, that formula is cost x 8. I know, that sounds ridiculously high, but the formula stands because it works. The cost of a book is generally calculated by the amount of money it takes to actually print the book (binding, cover boards, headband, paper, ink). However, there are other costs involved to bring that book to the brink of printing, such as software, labor, graphics, layout, electricity, coffee (yes indeed), and so much more.
Then, there are the discounts and commissions that need to be accounted for when the book is actually sold – the distributor gets their cut (generally 20%), the wholesaler gets their cut (typically 40%), the author gets their payment (10-15%), and the publisher gets the rest – about 25% of the book’s sale price, which should work out to be 2x the amount the book cost to bring into existence. Subtract your printing and overhead costs and what is left over, my friends, is the profit!
The problem is that pricing doesn’t always work out that perfectly. Depending on volume, a hardcover book can cost anywhere from $5-$10 to print. While $40 may not seem too expensive for a big, beautiful hardcover book, generally a price tag of $80 is pushing the upper limits for a book, no matter how beautiful the images or how brilliant the content.
And so the X8 rule often gets ignored and the publisher struggles to make a profit.
Ebooks and products delivered digitally do not require the same percentage mark-up as a printed product, however many content creators and consumers alike mistakenly believe that digital goods are free to produce. They are certainly not. Not including the exorbitant amounts of time that gets poured into product creation, there is still the cost of software, equipment (computer, recording equipment, etc.), specialized labor (graphic designer, transcriptionist, editor, etc.), electricity, coffee (yes, still that), and other random costs to factor into the price.
This same concept of cost multiplication applies to every other industry, although the formula will change slightly, or maybe even considerably, to account for a variety of specialized conditions.
My husband and I also own a brick and mortar business in which we sell a service – pet boarding, grooming, and daycare. When pricing one of those services, we total the costs associated with performing that service (labor, parts, materials), add in overhead costs (rent, electricity, internet, taxes), add a cushion, cross our fingers, and set a price.
Ah, pricing… It’s both art and science.
Now, how do you know if you have arrived at a good price?
- Are you having trouble paying your bills, for both hard costs and overhead? No? That’s good!
- Do you get frequent complaints that your prices are too high? Yes? By itself, this is not actually a reason to change or lower your prices. No? Maybe you should raise your price just a little. 😉
- Can you buy your widget in larger quantities to get your costs down? Yes? Then you should as long as you can sell them within 12-18 months, generally.
- Can you go an extra mile to surprise and delight your customers? Yes? Then get creative and do it.
At the end of the day, your pricing needs to both work and feel right. Is your price point working for you? Are you covering all of your costs? Secondly, how does it feel? Does it feel too steep to you? Does it feel too cheap? Can you add more value to increase your price?
When bringing a product or service to the marketplace, the last thing you really want to do is compete on price. Instead, compete on quality, on speed, on unique features, and above all on transformation.
Does your product or service bless, inform, inspire, and/or transform your customer? Then it’s worth every penny and both your attitude and your price need to reflect that.
Happy pricing! 🙂