Pricing your products
In last week’s post I talked about how you can check your pricing to make sure that every sale you make generates enough cash. It’s a vital exercise to make sure that you build a sustainable business.
That said, a question I get asked a lot is how you decide on the price you charge in the first place, so I thought I’d make that the subject of today’s post.
I could probably write a whole book on this, having spent hundreds of hours talking about pricing during my career! Working out the price is part art and part science but there are a few basics principles that are important to apply.
It’s not about price, it’s about value.
There is a school of thought that says that the price you charge should be your costs times a certain factor in order to get your price. That's a useful rule of thumb but taking that approach does take into consideration one important fact.
The price that you charge your customer isn't the price you need or want to charge. It's about what the customer is prepared to pay. And the customer is prepared to pay what they believe is a reasonable value for your item.
Value is the combination of quality, style and price.
The value that the customer sees in a product is created by 3 elements - the price, the style and the quality.
Let's look at these elements individually.
Quality - if you deserve to charge more, explain why.
If you can demonstrate that a product is higher quality than competing products, the customer will pay more for it, so you don't have to be afraid of charging more if your product is really worth it.
Explaining why it's better is important. Hopefully that is obvious but especially when you're selling online, it can be hard to explain what's so good about your product. If it's handmade by artisans in Italy, you need to explain that. If it is made of superior quality fabrics, that's a great feature to highlight as well.
For handmade products, tell them about the inspiration that you had when you were making it or show pictures of behind the scenes. This will help reinforce the idea that your goods are worth more.
It's all about the customer's perspective when it comes to quality. For example you may know that the certain stitch that you used on a garment is twice as much money as another stitch because it's a slower technique and it takes more hours. If your customer is totally oblivious to the difference between one stitch and another, you can explain in detail why it’s superior, or not charge a premium.
Even if goods are not premium, they have to have a basic level of quality that is acceptable to the customer. Poor quality goods are a very quick way to lose business, no matter what your price. Even Primark, who use low quality fabrics and cheap production techniques have basic quality standards.
Style - know your customer and make it irresistible.
Style is the most subjective of all of the elements that make up value. We each have our own style, and a vase that will have your aunt pulling out her wallet with excitement will leave you cold. And yet, it’s the most powerful element of a product.
We’ve all had that moment where we’ve walked into a shop and seen something that we don’t need but that we MUST have. We’ve either splurged then and there, or we’ve gone home, fretted about it and ended up buying it or making someone give it to us for our birthday.
If you can create product that produces that feeling in your ideal customer, you immediately create what is known as “price elasticity”, or the ability to stretch your prices higher. The more you know about your customer, and the more you can put yourself in their shoes, the more likely you are to create a product that is irresistible to them.
Price, quality and style work together
To illustrate how quality, price and style work together, here are a few combinations:
Luxury goods. Quality is excellent, Style is appealing. Price can be premium.
Commodity. Quality is acceptable, Style is basic. Price has to be ultra-competitive.
Fast fashion. Quality is acceptable, Style is appealing. Price still needs to be competitive, but is higher than commodity.
If you are struggling to get the price that you know your product deserves, ask yourself if you are doing enough to communicate your quality, and if your style is appealing enough to your customers.
You have to understand how your customer thinks about value.
Perception of value varies from person to person. One customer will see a notebook that they love, and think that £10 is a bargain. Another customer will dislike how it looks, so for them, that price tag is unacceptable.
There are a few ways to work out what your customer thinks about value. Most simply, you can ask them - either face to face, or by running surveys. Asking them what they have paid in the past is a better indicator than asking them what they would have paid in the future. So a survey of their most recent purchases in your category and what made them buy is more use than asking them "Would you pay X for Y?".
Check out the competition.
Another way to understand how your customer sees value is to check out the competition. If they are selling the majority of their products at one price point, you can bet that it is working well for them.
Every retailer will spend the same number of days a year going out and looking at what the competitors are doing and reviewing their websites. It's an important process in the industry and can be a very valuable way of understanding how you measure up.
But don’t follow a formula.
Understanding your competitors is basic good business sense. However you don't have to follow a formula. You can have your own pricing and it can even be a point of differentiation between you and your competition. Again it comes back to value. Do you believe you have a superior product at a great price? That's a great point to highlight to your customers.
Watch out for psychological barriers.
There are reasons that many websites group products into certain price categories - “Stocking fillers under £5”, or “Gifts Under £50”. Psychological barriers are prices like £5, £10, £50, £100. It's useful to understand what these are for your market. If you see a lot of £49 price points for a top, you know that they’ve found £50 to be the cut off at which the customer will not pay any more. If you change your prices and sales drop off, check if you’re crossed any psychological barriers with your new pricing structure.
In the end, only your customer can tell you what the right price is.
Ultimately only your customer can tell you exactly how much they are willing to pay for your items. A great starting point is a pricing structure that generates enough profit, looks sensible against your competition, is consistent across your products and reflects what you truly believe your customer will pay.
After that, it's about checking that every part of the customer journey conveys the value in your product - from the product descriptions, to highlighting the making process, to how you package the goods for sale.
Continuing to monitor your sales is the best way to keep improving your price structure. You can tweak where prices don’t seem to be working, or increase prices where sales seem too fast. It's a good idea to give products at least 4-6 weeks at their original prices to see how you get on.
Ultimately, pricing theory is just that - a theory. The only way to know what works is to try it and see.
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