The right price is the highest price the customer will pay.
Rafi Mohammed, The 1% Windfall: How Successful Companies Use Price to Profit & Grow
If you’re anything like me, and many eager but misguided others, you’ll cut to the chase, show 'em the product, and pen poised, ask what they’d pay for it. It took me a dozen customer development interviews to realize that this approach is a complete waste of time. Here's why:
"How much would you pay for this?" doesn't work.
Turns out, people are nice and will promise all sorts of things until they actually have to pull out their wallets. They're also terrible predictors of their future behavior, so stay away from “would you...?” questions leading to false positives that will take you down the wrong path.
"How much do you think this costs?" is much more informative.
In this way, people will tell you what they think your product is worth. After asking only a handful of people, you'll have a baseline with which to test. Then create collateral using this baseline price as fixed, but tweak the marketing message. This allows you to compare which value propositions are most effective.
In focusing primarily on the money aspect early on, I missed out on potentially juicy insights about how we might better solve our customer's problems. Remember, during early customer development the only thing you should care about is whether or not people will pay anything at all for your product. Once that's established, then optimize how much and for what. Read on for few tips to get you started.
Good pricing strategy means influencing people's perception of value.
STEP ONE: Anchor pricing to existing products.
Ground-breaking new product? Awesome, you’ve got first-mover advantage. Problem is people have no frame of reference for comparison and won’t know how to assess value. If your company is up against incumbents, they’ve done you one favor already: setting the price range.
During the interviews keep this number in your back pocket. What you want to hear is that the answer to our money question above - double entendre! - is smack dab in this range. This will also come in handy when refining your business model.
Because we’re not very good at figuring out what we are willing to pay for different products and services, the initial prices that new products are presented with can have a long term effect on how much we are willing to pay for them.”
Dan Ariely, Predictably Irrational
Test a variety of structures including an a la carte price, subscription pricing, and tiered combo packages. Most marketers think that new customers will pick the cheapest option when first trying out a new product. Turns out, we are not such simple creatures!
Price isn’t always the bottom line. Research by Ariely has also shown that people tend to pick the better quality option, even if it’s a bit more expensive. If you want to get crafty, employ a premium decoy pricing strategy and include a cheaper option and an outrageous outlier. This usually results in people picking the middle option.
- Find out if people are willing to pay to solve the problem.
- Anchoring prices works.
- Test different pricing models.
Good luck! Keep me updated on your findings.