Choose a price that sells! (Part I)

The best price is that price that maximizes your profits while building a lifetime customer through value satisfaction. On the Internet, time waits for no company. Your customer has access to tons of information through the Web. Your competitor is a mere mouse click away. You have to get the best price right... the first time. In the digital market scene, there are very few second chances. Pricing is risky. What price is too high? What price is too low? Will a certain price work three months from now? Do you know? Do you know for sure? Pricing is the single most important marketing decision you'll ever make. You have to know what price you should charge so that you can promote it effectively and place it into the hands of your customer. It's the marketing guide to success! Ken Evoy from SiteSell priced their first e-book, Make Your Site Sell! (MYSS!) at: http://newsletter.easy-home-business.com/hts/myss.html at the ridiculously low price of US $17 to penetrate a competitive marketplace. They wanted to overwhelm their customer with high-quality information at a price that anyone with *any* interest at all in selling on the Net could not reasonably refuse. The result? Huge sales, delighted readers and MYSS! is known as the BIBLE of how to sell on the Net... While they knew the general strategy for MYSS!... Did they know the right price before starting out? No way! Did they know what effect $5 more or less would have on the bottom line? Nope. Did they like that lack of confidence? Strike three. Take a minute or a few more... go back to the computer and do a search on the Net for the keywords "pricing" or "pricing software". I'll wait right here.... :-) ... No surprise that you're back so soon! There's not much out there to help anyone, small or large business owner, to price perfectly. If you are selling a commodity, you already know that your profit margins have to be razor-thin. You are forced to compete on price. It's sometimes the only thing that sets you apart from the field. Your business operation has to be seamless. Gaps are too costly. If you have a proprietary product, its uniqueness and benefits have to be recognized as such by the market. You have to know if your product has enough original features to warrant a higher price than the cookie-cutters around it. What are the usual approaches for pricing? The traditional "bottom up" salad bowl approach... direct and overhead costs tossed together with market pressures before being "dressed" by the price A chat with your salespeople A look at the competition's markup I think we agree that pricing is critical to our businesses. It's the only part of our operating equation that brings money into the company and into our individual pockets. It's the P that "extracts the value" out of the perceived value that you create through the product itself, and through your promotion of it. Because of that, the price for a product or service has to be a top priority. The perfect price maximizes profits... and income is what it's all about at the end of a business day. Luckily for you, but definitely not for your competition, you're on your way to success. After reading this web page, you will know how to determine the right price. You will know how to *find* the Perfect price. THE 4 P OF MARKETING First of all examine your business using the 4 P of marketing magnifying glass. Look at your Product. What do you sell? What does your customer buy? What are its major benefits? How important and unique are they? Look at your Promotion. How do you promote your product or service? Look at your Place. How do you ship from place A to place B? Look at your Price. How do you decide on which price to charge? How did you decide on your "macro" pricing model (ex., penetration-pricing or priced model) and how did you choose the exact number? Write down your answers. You need a strategy for every part of your business operation to guarantee success -- the pieces of the e-commerce puzzle have to fit together. You need to be able to set the best price of your product or service with clarity. And you want to see the results of that decision *increase* the income side of your ledger. PRICING MODELS PRICING TO PENETRATE: Your objective here is to penetrate the market fast and deep. In other words, sell as many units of the your product as possible. So, you set your price low. Use this strategy to establish a powerful position in the market quickly. Why? The basic goal is to acquire as many customers as quickly as possible. In other words, you are "buying market share" to establish dominance. You may also be sensing that more competition is on the way. Market dominance is particularly relevant when you consider that shopping (and buying!) on the Internet is about to explode over the next two years... all over the world, not just in your neck of the woods. You want to have a well-established online presence before the throngs of new customers are grabbed by other businesses. The best price to penetrate was the model for Make Your Site Sell (MYSS!), the BIBLE for making a site that sells. SKIMMING THE CREAM: This is the opposite pricing strategy to penetration. Here, the best price is deliberately set high, in order to reap large profit margins. This is usually at the cost of losing a large number of customers. High price tactics are also known as "selling off market share." You gain income from those high profit margins, in exchange for having a smaller and smaller percentage of the market buying your product. This model works well if you have a proprietary product. Some customers will pay more for uniqueness, especially if good value is perceived as part of the equation. Typically, two scenarios work with high-pricing... When you first launch a product and want to recoup all the R&D quickly. Good examples are consumer electronics "Prestige pricing" -- Mercedes-Benz, Tiffany's. Sometimes an example is worth 1,000 words. :-) "Skimming" carries some important risks... Big profit margins attract competitors who want a piece of the same pie. The only difference though... they are willing to shave dollar signs off to get the eye of that Web customer with the open wallet. The second "speed bump" has to do with public relations. Your business will not survive if customers feel that they have been "taken for a ride" BEST PRICE TO KILL: Here, profit is definitely not the objective. No competition is the goal, at whatever cost it takes. It's *not* for the faint of heart. In many cases, it is not even legal. OK. Three distinct business/pricing models. Which one matches yours? For small-to-mid-sized businesses, your choice is usually between penetration pricing and high- pricing. Don't make the mistake of doing a "little of each" -- you'll end up in a fatal valley between the two. Ask yourself these four questions... What was my goal when I chose my model? Knowing where I am now with my business, would I have chosen a different approach? What are the pros and cons of my pricing strategy? Which model do I see myself using three months from now? With confidence? THE PSYCHOLOGY OF PRICING Let's consider the power of the following selling techniques... The arranged smell of fresh-baked bread in a house to ignite childhood memories of food or family in the prospective home-buyer. Fresh flowers/produce near the grocery store's entrance to encourage impulse buying --something that's not "on the list". Big sale signs at the back of the boutique to force the customer to walk by all this season's clothing styles. The offer of free money or big prizes on the Web site in order to get the visitor's click and cookie. All four strategies above involve pyschology. It's a reality in the business world today. You've got to be able to get inside your customer's head. And not leave one empty space for your competitor! It's a race for "share of mind." Pricing is no exception. Reflect on the psychology in our guiding e-commerce statement... The perfect price is that price that maximizes your profits while building a lifetime customer through value satisfaction How do you define "value satisfaction"? By putting yourself into your customers' shoes -- simple but often ignored advice. Sometimes a vendor thinks that s/he knows what's best for the customer. Let's call it the "mothering-smothering effect." If you reverse your viewpoint by coming at it from your customer's angle, then you start to look at your product differently. (That's the funny thing about pyschology, it works on both sides of the business fence.) Price to attract those first-time customers and let the value of your product "keep" them with you for a lifetime. So where do you start? That's as easy as counting... ONE) The most common pyschological technique is to use a price that ends in any number but 0 or 1. We all know how much better 99 cents sounds than $1.00 -- and $997 in comparison to $1000. How W-I-D-E that narrow gap is to our buying ear. The customer feels like the saving is MUCH more than 3 dollars... And s/he credits that "good feeling" to you, the vendor. This effect happens even more so with the next method. TWO) "Value-bundling" gives the customer the great feeling of getting something for nothing. Here products that have a logical association with one another are grouped together and a better price is set for the combination. Value-bundling is a powerful method if the price of your bundle equals the price of the most expensive component. Yup, you know,the refrain... "I would've paid that much just for the... " Want an example? SiteSell.com value-bundled Make Your Knowledge Sell! (MYKS!) http://newsletter.easy-home-business.com/hts/myks.html to the extreme. MYKS! shows you how to find "the infoproduct within," how to create and publish it, and how to market and sell it. It's under one single "MYKS!" roof. You need *absolutely* nothing else to succeed at selling what's in your brain. If they had stopped there, the value alone would be terrific. But they didn't stop there... They added 7 more indispensable tools so MYKS! is actually "The Complete Infopreneur's Toolkit" and not just a book. THREE) 15%, 25%, 40%... how much louder that price tag seems to scream as the percentage grows. You bet, it catches the ear and eye of the customer. Use discounting to... Build existing customer loyalty. This is so easy on the Net. You can reach previous customers with a quick e-mail and offer them a price reduction on your new product. To emphasize the point, set up a special discount url for this select group (which, of course, should include your deserving affiliates.) Show your appreciation concretely. Encourage or reward bulk buying. Go beyond the obvious reduced "per unit shipping charge"... offer "three for $20" (or better, $19.95) for that $7 bottle of wine. Sure, the margin is a bit less... but your gross is much better. Your customer saves on shipping, product cost, and gets that Runder $20 psychological boost. Compete with your competitors as in the case of seasonal deals or for special markets like seniors and students. Who can turn down a good deal? Not me (at least that's what my wife says!). Discounting can be a strong tool. But it's not without its own Achilles' heel... Define your goal clearly, before you discount. Otherwise, you're just giving money away. Who can afford that? -- FOUR) The third pricing approach uses the pyschology of perception. You know that truism... Quality is in the eye of the beholder. And where does "the eye" land on the Net? That's right. On your Web site. If your site makes a great sales effort, you will be able to build a higher perceived value. And that will support a higher price for your product. It's *worth* it to the customer. This is IMPORTANT -- if you sell via the Web, one of your site's most important functions is to build perceived value. Whatever that value is, when it comes to selling on the Net... Never price beyond the value that your Web site creates and that your product supports. Not if you want to build a successful, growing, long-term business, that is. FIVE) The final strategy examines the price-sensitivity. I call it "rubber band" pyschology. Customer perception comes into play again, as well as competition on the market. If demand for your product drops when you increase the price by only 1%, you have a product that is very price-sensitive or price-elastic. If on the other hand, doubling the price only causes a slight drop, you have a price-inelastic product -- that means that it almost doesn't matter what price you charge because people will still buy it... within limits, of course. Make Your Price Sell! http://newsletter.easy-home-business.com/hts/myps.html can let you finds those limits, plus the perceived value of your product, you will be able to use a line graph to see how your product reacts to changes in the price. OK. That's it for the psychology of pricing. What's the key point? No matter what approach you use, it has to "ring true" to the customer. S/he will only be attracted to your price and product, if it's *worth* it. Written by Dr. Roberto A. Bonomi