Are You Making the Most Common Pricing Mistake?
Are You Making the Most Common Pricing Mistake?
Would you like to make more money by doing the same amount of work? Of course, everybody would. This is why “pricing your services” is such a hot topic. Utilizing smart pricing strategies when selling products, services or subscriptions is a must to succeed in a competitive marketplace.
The worst thing you can do is to try to wing it when it comes to pricing. Many entrepreneurs and marketers make this mistake.
So, Whether you are self-employed or represent a Company, the price you charge for your work determines how much you make for the work that you do.
There are many methods of pricing you product or service, some popular ways of setting your pricing are:
Cost-Based Pricing
Cost-based pricing is arguably the most popular pricing method for service-based businesses. In simplest terms, you're pricing your services/products based on time and materials. You determine an hourly rate for your services; you combine the cost of materials/hours required with any additional expenses incurred; and then you charge accordingly.
Value-Based Pricing
Value-based pricing is the opposite of cost-based pricing in almost every way, including countering the pros and cons of cost-based pricing with its own. In simplest terms, value-based pricing is charging based on the value your service is providing the client, not necessarily on the time and materials involved.
Hourly-Based Pricing
You get paid for every hour that you work, eliminating scope-creep.
Said that, No, the big mistake is not charging too little, though that is a very common mistake as well. The mistake is to have only one price for your product, no matter your approach to pricing.
“The price you charge for your work determines how much you make for the work that you do.”
What’s the best way to sell a $2,000 watch? Right next to a $10,000 watch.
Why? A common cognitive bias called anchoring is the culprit here. Anchoring refers to the human tendency to rely too heavily on the first piece of information offered when making decisions. This bias is why a $2,000 watch almost seems like a bargain next to a more expensive watch, but would seem like a super-premium purchase when placed next to a $49 Timex.
This tactic is often used in restaurants, where expensive items are placed on the fringe of the menu to make other items look cheaper by comparison. By placing premium products and services near standard options you can create a clear sense of value for potential customers, who will then view your less expensive options as a bargain in comparison.
If you add more choices on the table, there will be a psychological effect that you can leverage when you present your pricing options to your clients. It’s called “price bracketing.”
“A psychological effect that you can leverage when you present your pricing options to your clients. It’s called price bracketing.”
What is Price Bracketing?
the Definition for Price bracket is: a notional range of prices which consumer are prepared to pay for goods or services.
Have you ever seen three different prices for a product or service? Maybe something like this:
$19/mo - Basic (some simple stuff)
$39/mo - Plus (more stuff, but not as much as what comes next!)
$99/mo - Pro (all the things, because hey, you’re a pro, right?)
You don’t even know what I’m pitching here, but I’m guessing you are already thinking which bracket you might fall into.
Perhaps you love doing everything on the cheap, paying as little as possible, and would love to think you are still able to use the same product as all the others are paying more. However, if I can convince you that the “Plus” package is 10x better than the Basic, while only being 2x more ecpensive, then the cheapskate in you is now turned on by the middle-tier, and at least it’s not that crazy-expensive pro tier!
What I’ve just done here is provide you with price brackets. Humans love to compare things, especially price. If I offered you one price, you’d go shop that price around with other options for a similar service. But if I provide you with some comparison prices on my own pricing page, then you start price comparison right here on one page!
When you offer multiple choices to your clients for a price, they will feel better about the choice that they’ve made, because they’ve chosen it against other options, and you will have the opportunity to maximize your profits based off of your client’s willingness to pay money.
Some clients will always choose the highest package simply because they want to associate themselves with the highest tier, which is why naming this level something like “Pro”, “Enterprise”, or “Gold” will draw these certain types in simply with your price bracketing.
“Humans love to compare things, especially price. ”
Does this work with service-based businesses?
The previous example was for software or physical products that could be sold in one transaction or monthly base. Let’s do another example with service based, let’s say you area Companies services provider.
You help in Company incorporation, secretary, office address, and financial company maintenance. Some packages might look like this:
Bronze ($1,000) - Company formation, company secretary, Bank Account Opening arrangement, and all government fee included.
Silver ($2,500) - Everything included in the Bronze + 1 year Registered Address + Mail and Parcel Handling with Mailbox
Gold ($5,000) - Everything included in the Silver + Price Phone Number + Call Answering and Message Taking + 3 hours Monthly meeting room + Fax email services.
Now, you might still build custom packages outside of these, but at least you’ve provided some options for your clients to start thinking about.
When coming up with pricing for your product or services, I’ve heard this ratio over and over again as one that seems to work well:
1st Tier: 1x base price
2nd Tier: 2.5x base price
3rd Tier: 5x base price
This ratio separates the tiers enough that each one is taken to a new level from the previous, without going too high and no longer reasonable for consideration.
“At least you’ve provided some options for your clients to start thinking about.”
Lets do the Math
Now let’s get into these ideas and let’s do some calculation.
I offered 3 packages for this electronics equipment (basic version and Pro version with more features); each higher package had more features and delivered more value than the last.
Here is the package breakdown and how many sales from each:
Only Basic Equipment ($250) – 100 products sold
Pro version Equipment + training + warranty extension ($600) – 300 products sold
Pro Version Equipment + training + warranty extension + yearly maintenance + 24/7 support package and yearly calibration ($1250) – 80 products sold
What gets more interesting is when you look at revenue from each package:
Only Basic Equipment ($300) – 100 products sold = $30,000
Pro version Equipment + training + warranty extension ($600) – 300 products sold = 180,000
Pro Version Equipment + training + warranty extension + yearly maintenance + 24/7 support package and yearly calibration ($1250) – 80 products sold = 100,000
So the package that sold the least generated 40% of the revenue. Nice!
Let’s redo these numbers assuming that I only offered the one lowest price revised up to $ 500, the fact is the total revenue generated would be $240,000 against the $310,000.
Now, I could have increased the price of my single product more, which presumably would have increased revenue above the estimated, but I didn’t want to price too many people out of the product. By adding additional packages, at different prices, I still allowed everyone to purchase the products, but I gave those who were willing to pay more an opportunity to do so.
You may be thinking that if three packages worked so much better than one, should we try five or ten packages? Unfortunately it’s not that simple, based on “The Paradox of Choices” (here’s a TED talk on the topic from the psychologist Barry Schwartz‘s) shows that when given too many options, fewer purchases are made.
“When given too many options, fewer purchases are made.”
Get Creative
There are no hard and fast rules when it comes to price bracketing. Sometimes you’ll have to experiment and see what appeals to your customer base the most. You can also take that last tier and change the pricing to “starting at x” to provide more wiggle room to go higher for clients who have larger budgets. Remember, humans love to compare, and love feeling like they are getting a good value for their money. Price bracketing does just that. It provides a framework for them to size up the value for the money, and leads them towards spending an amount that they are comfortable with that could lead to higher profits for your business.
“Sometimes you’ll have to experiment and see what appeals to your customer base the most.”
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