When you’re launching a new product, one of the most important things to consider is your pricing.
There are arguments for low prices or high prices.
Advantage of Low Prices
A lot of entrepreneurs I speak to favor low pricing when launching a new product, almost as if by default.
The main advantage of charging low prices is that you may attract a lot of customers. And if you price your product low enough — e.g. lower than all of your competitors, a la Walmart — you may be able to steal market share from existing competitors.
The reason I say this “may” work is because your low pricing may not provide you with enough profit/sale “cushion” to acquire a customer profitable via advertising and marketing. Instead, you may be going negative on every new customer — and that’s a tough way to launch a new product before you fully understand the lifetime value of your customer.
As you can probably tell, I don’t like this strategy (unless you have deep pockets and/or you have a recurring revenue model). We’ve had much more success launching products with high prices — typically higher than our competitors.
Advantages of High Prices
Here are what I see as the advantages of high prices:
1. With higher prices, you can afford to spend more in advertising and marketing costs to acquire a new customer at break-even or slight profit. This gives you more room for error with your initial customer acquisition efforts, and it also allows you to scale your advertising. Scaling advertising via premium pricing (ability to absorb high cost/sale) is a much more powerful strategy for building market share than playing price limbo.
2. If you price high, you can earn more profit/sale. Sometimes it’s important to remember that we’re all in business to earn profit, and premium pricing makes that easier.
3. By charging premium prices, you position your company as a premium brand and attract higher quality customers who have less price resistance, provide fewer customer service headaches, and can afford to buy additional products and services from you. Would you rather be Ferrari or Kia Motors?
How to Charge Premium Prices – And Advertise Profitably
Step 1. Decide on the Price, Based on Likely Cost/Sale
Often, when we’re launching a new product via advertising, we first research what the price has to be in order to have enough profit/sale to absorb a reasonable advertising cost/sale.
For example, when we’re launching a digital product or service, where there’s no marginal cost, we look at what the cost per-click in Google AdWords is for a target keyword, and then we multiply that number by 100X. So, for example, if the cost/click for a given keyword is $1, then we’ll plan to sell that product for $100. That means that if we tested advertising and achieved a 1% conversion rate (which is reasonable), we’d break even.
Often, we’ll test prices higher than the 100X mark, because you don’t want your marketing to have to go perfectly in order to earn a profit. That’s a recipe for disaster.
And once you’ve set high prices, it’s time to justify your premium pricing in your marketing copy.
Step 2. Justify Price Based on Value Provided, Not Cost of Production
A lot of companies make the mistake of pricing based on the costs to create or deliver a product, and therefore they often arrive at low prices.
Instead, I recommend you price your products based on the value of your product to your customer. For example, if your competitors are selling their widgets for $20 and your product lasts 5X longer than your competitors, your customer won’t have to replace the widget as often. By purchasing your product, your customers save $80 in replacement widgets, so perhaps they’d be willing to invest $40 to save $80. That’s one way to justify a price 2X higher than your competitors.
Step 3. Add Even More Value to Justify High Price
If the current product doesn’t seem to justify the high price necessary to sustain a significant cost/sale, go back to the drawing board and ask, “What features/benefits could we add to this product to make it worth $XXX?”
That’s the question that’ll help you arrive at a premium product that deserves to sell at premium prices.
Here’s a summary of this pricing strategy, in a nutshell.
How to Use Premium Pricing to Dominate Your Market
- Determine necessary cost/sale to acquire customers profitably via advertising
- Build premium product with enough profit to absorb this high cost/sale
- Scale advertising and marketing to capture market share from competitors
Share Your Comments
Do you agree or disagree with our stance on high pricing? Have you had more success with low prices or high prices? We want to know. Post your comment below.