Scenario: "Dude, nobody's buying our $2,995 sweet, versatile, detachable, and sexy truck. Our product sucks. Ahh!" Whoa-fa-shizzle. When that product fails to sell, entrepreneurs think: "It's a crappy product." When that product sells -- but, loses the company money, entrepreneurs think: "It's a crappy product." The common theme goes:
- "Let's build the next revolutionary widget!"
- Spends $$$$ building the widget.
- "Judging from (1) how much we invested into the widget and (2) how much money we want to make, the widget's price must be: $___.
- Product gets negative return on investment.
- "We have a crappy product, folks. Time to dump it."
Uh-oh. Take a chill pill: Likely, it's not the quality of your product that's losing your company money; it's how crappy you're pricing it.
Your Product Probably Isn't So Bad After All
If camouflage sweat skirts for dogs can sell, anything can sell. Someone out there -- out of the 250,000,000 people on the U.S. surface, let alone the 6,500,000,000 in the world, working in 17,000,000 businesses, spanning 20,000 cities, situated on 3 million square miles -- wants what you sell. Your job: Find that person who wants what you sell. Then, provide the right environment that compels that person to buy (e.g. sweet marketing materials, clean floors, clear price tags, quick service, happy employees, etc.) A crucial element to that "right" environment: the product's selling price.
- A product that you price too high will dissuade buyers.
- A product that you price too low will leave money on the table -- costing you profits.
Your goal then: Find the best price for your widget that gives you the biggest return on investment (ROI)
"What in the mutha do you mean by 'biggest ROI?'"
Say you sell a bicycle that costs you $50 to make and market.
- A $100 sticker price will net you $100 - $50 = $50 each. You sell 100 at this price point. (Net: 100 * $50 = $5000)
- A $200 sticker price will net you $200 - $50 = $150 each. You sell 20 at this price point. (Net: 20 * $150 = $3000)
Seeing how the $100 sticker price gives you a bigger ROI, you go with the $100 sticker price.
"So, what do I do?! What in the name of Shiloh-Nouvel-Jolie-Pitt do I do?!"
As with most things in business: experiment! Experiment with your prices until you get a price point that produces an amazingly sweet ROI. With the bicycle example above: you don't know whether a $100 sticker price is the most optimal, so your badass starts experimenting with other price points (e.g. $40, $140, $240, etc.) It's as if you're pruning a tree: cutting tree limbs, removing infected areas, modeling a symmetrical shape one-leaf-at-a-time -- until you get a tree that's healthy, sexy, and beautiful. Two points of advice:
- You won't get a solid price point on your first try, second try, third try, or 10th try. It's an ongoing, iterative process.
- You'll never get a "just-right" price point because market demands change every second. Choosing the right price is like shooting for the stars: you'll never get there -- but, the closer you get, the happier you'll see your bottom line.
How to Experiment with Your Prices
Your badass might be screaming: "But dawgs, I don't want to confuse my potential customers by changing prices incessantly. I will lose them!" We hear ya. Don't sweat. Confusing your customers about your different prices points is the last thing we want you to do. Instead, take the subtle route to price experimentation:
"How Do I Experiment with Price Reductions?"
You know why most smart businesses put items on "sale"? They're experimenting with different pricing points. Start putting your widget on "sale" at 10%, 20%, 50%, or: __%. Then, measure which pricing point gets you the biggest ROI.
"How Do I Experiment with Price Increases?"
Experimenting with price increases is a little more tricky because people are more sensitive to them. The minute you raise your prices, the minute they're looking for exit doors. So, the trick is to avoid increasing the sticker price. How do you do it? We'll explain.
How to Raise Prices Efficiently
Use our secret sauce -- inspired by Harvard's John Gourville: Reduce your costs of goods sold (COGs), while keeping the sticker price intact. That is, you're selling something at the same price point that costs you less to make.
The Sweet Lemonade Example
Say you're selling 12-ounces of lemonade for $2.00. Now, to experiment with "price increases" for that 12 ounces of lemonade, do two things:
- Keep the $2.00 sticker price.
- Reduce that 12 ounces to something smaller: say, 8 ounces.
(That would mean 12-ounces of lemonade would theoretically cost: 12/8 * 2 = $3.00.) Start experimenting with different amounts like a mofo, and see what gives you the biggest ROI. To reach that elusive oh-my-$#@%!-gosh-we-be-rollin' ROI:
Experiment with your product's prices like a badass.
Posted on November 26
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