How much is my product worth - and what is my customer willing to pay? Every entrepreneur asks these questions at some point in their small business journey. Mark Stiving, Chief Pricing Educator of Impact Pricing, joins Andrea with insights.
(2:00) How to think about pricing your product or service.
(02:58) How to figure out how much your customer is willing to pay.
(04:46) Should you start pricing your products at a higher price?
(06:04) How to grow a subscription model and why it's beneficial.
(07:51) How to remain competitive while still growing.
(09:21) What are valuables and how can they help your business grow?
[00:00:00] MARK: I always put myself in the shoes of the buyer and say, what decision are they making? How are they making this decision? And that's how we figure out what's the price point we should be charging or approximately what's the price point we should be charging. A lot of companies use something we'll call cost-plus pricing. Oh, it costs me a dollar. I want to make 50 points of margin. Therefore, I charge $2 for it. But that has nothing to do with what your market's willing to pay. What if you have customers who would pay you $10 for that? Don't you want that? And so now we're thinking through; what's a customer really willing to pay. And that's what should be driving our pricing.
[00:00:42] ANDREA: So pricing is a little more complicated than just figuring out your cost-plus pricing. What you should be doing is trying to figure out how much your customer is willing to pay, but that's a lot easier said than done. So, let's figure out how we can get into the minds of our customers and if there's any other considerations a small business owner [00:01:00] needs to keep in mind when thinking about pricing.
[00:01:05] Host: Hi, This is Small Business, a podcast by Amazon. I’m your host, Andrea Marquez. This is one of our Minisodes, which are shorter episodes packed with helpful information for those of you who want a quicker binge. On This is Small Business we cover all things small business that will help you start, build, and scale your business. You’ll hear from guests with diverse backgrounds, point of views and stories, with the hope of hearing from many types of small business entrepreneurs. On this episode we'll be talking about pricing and figuring out how to set prices for your products or services with Mark Stiving, Chief Pricing Educator of Impact Pricing. To learn more about him visit our website at thisissmallbusinesspodcast.com. Also, remember that if you want to hear your story on This is Small Business, we have a voicemail line where you can ask questions or share your entrepreneurial story. We want to hear from you! Find the link to the voicemail line in the episode description.
[00:02:00] ANDREA: There's a lot to learn here so let's jump right into it, Mark, how do you think that a small business should think about pricing their product or service?
[00:02:05] MARK: The very first thing is what's your company strategy? Businesses will say my company strategy is I need to grow users so that I can get a higher valuation and get my next set of investors. In which case what we're trying to do is we're trying to put some relatively low price on our product because we want to show investors that people are willing to pay for it, but we want to keep the price low because we want to get as many users as possible. On the other hand, there are a lot of small businesses that are trying to grow more slowly. As in, I need to pay my bills while I'm growing my business. And in that case, we do what almost all large businesses do too. And that is understand what does value mean to our customers? What is value-based pricing? And to me, value-based pricing simply means charge what our customers are willing to pay.
[00:02:56] ANDREA: How do I figure out what my customer would be willing to pay?
[00:03:00] MARK: There's a lot of different statistical market research type things that companies can do. Possibly my favorite and easiest is Van Westendorp's Price Sensitivity Meter. It's been around since the 1960s. But they essentially ask four questions. First you describe the product as though you're trying to sell it. And then the four questions you ask are something like, at what price do you think this is so expensive you would never consider it? At what price do you think it's so cheap, you think the quality couldn't be very good? At what price do you think it's starting to get expensive, but you still might consider it? And at what price do you think it's a bargain, a good buy for the money? And of those four questions, the third one is absolutely the most important.
Let's call that technique that we're going to use for B2C type businesses. So if you're going to sell to a consumer, we really go after this concept of how much are you willing to pay for something. In the world of B2B, typically, when we sell a product to another business, [00:04:00] the only reason another business is going to buy something from us is because they're going to make more profit after they buy and use our product. Value to that business is what's the additional profit. When we know what that additional profit is, that guides us in understanding how much we're willing to charge for what it is that we're trying to sell as a general rule of thumb, if there's no competition in a deal and I'm trying to get somebody to do something new, they've never done before, I can typically charge in the ballpark of 10% of that number. Now, of course, once competition gets involved, that goes down but that's how we think about it in the world of B2B. How much more money are you going to make because of this product?
[00:04:42] ANDREA: Usually customers associate a higher price with a higher quality product. Should a small business start at a higher price point because of this assumption, or would that be too risky?
[00:04:52] MARK: Typically, what you want to do is try to sell at a higher price point. [00:05:00] And that's only because what you're trying to do is create a product that's better than your competitions. It is really, really hard to start, run and succeed at a business where your competitive advantage is we charge a lower price. So you want to be thinking about how do I differentiate my product? How do I differentiate my company? How am I better than my competitors? And then how do I get to charge for that? However, we often hear the saying, we should start pricing high because it's easier to lower a price than it is to raise a price. It's really true. If when you release a product, everybody knows you release this product at this price point. And now it's hard to raise that price because people will dislike you. On the other hand, if we're a small business, most people don't know our price points. So it's easy for us to come out at a lower price point, prove that nobody says no to us. Guess what? We better be raising our prices. People don't get upset because the new customers don't know what the original customers paid.
[00:05:58] ANDREA: How about when it’s a subscription model. [00:06:00] What are the differences in considerations that a small business should make there?
[00:06:05] MARK: If you have the ability to build a subscription business, then they get much higher valuations. It's easier to do your business. If you think about it at the end of a year. You've probably got 70% of next year's revenue already booked at the end of this year. But the real trick is once you've won new customers, now you have to focus on how do I keep my customers. And, by the way, in order to win a customer, they have to believe our value story. As soon as they buy and start using our product, they now know the real value of our products. We have to deliver on value. So it's no longer perceived value. When we've done a great job at delivering real value to those customers, then we start to focus on how do we grow those customers.
There's really four basic ways you can do that. You can raise their prices, which often isn't that hard to do on subscribers. [00:07:00] You can upsell them. We often do good, better, best packaging. And so what that means is that a customer who bought in at the good level, They want more capability. They upgrade to the better level or the best level. So now we're getting more revenue from them. Another one is cross sell. Maybe I've sold you one capability and now that you trust me and love me, you're willing to solve another problem with my technology, my capabilities. And then the fourth way to grow a customer is usage. And this has a lot to do with pricing because if we price our product in a way that, as a customer uses more, they pay more than as we get them to love and use our product more, they end up paying us more.
[00:07:45] ANDREA: How do you think that a small business can remain competitive while still growing when talking about price setting?
[00:07:50] MARK: One of the most important things any business, small business, big business can do is understand how their customers value their products. [00:08:00] And one of the most important decisions we have to deeply understand is; are they making a “will I” decision? Or a, “which one” decision. A “will I” decision is; am I going to buy something in that product category? A “which one” decision is, this typically happens, once I've decided I want to buy something in a product category, I then say, okay, which one am I going to go buy? This is really important because sometimes people don't look at competitive alternatives. And if we understand when that happens, we understand that our buyers are much less price sensitive and we're talking to them about the value of solving whatever problem it is they're trying to solve.
If they're going to compare my product to a competitor's product, now what I want to know is, how is my product better, different than my competitor's product? And what's the value of that to the market that I'm going after? If I were trying to remain very competitive, I would make sure that my products are always highly differentiated. [00:09:00] I would know which customers value that differentiation. And I would focus on selling to that specific set of customers because they value the things I do better than my competitors.
I work with companies all the time, and we create these things I call value tables, where we start with Well, what's your product? What's the solution that you've already built? What's a feature that people love that your salespeople talk about? You put it on your website because you think it's an amazingly great feature. What problem does it solve for your customers? But when you can say that really clearly, then you're starting to understand what your customers really value.
And then you ask yourself, okay, if a customer has this problem and they buy our solution, what's a quantitative result they might expect? Once you can create that, then it's typically business acumen in a B2B setting that says, how do I take this
result and say, here's how much more profit a company might achieve because they bought this feature of our product. [00:10:00] Now notice what I just did. Was put a dollar value on a feature. This is so important because not only does it help us set prices, but once we've learned how to do this, we're now only going to develop new features, new capabilities that actually have value to our customers.
[00:10:25] Host: That was Mark Stiving, Chief Pricing Educator of Impact Pricing. He talked about pricing and figuring out how to set prices for your products or services. As always, here are some quick key takeaways from this episode:
- One. Figure out your company strategy. Are you trying to get more users and customers so you can impress investors? Then you'll probably want to lower your prices to increase your users. Or are you trying to pay your bills and grow your business? Because then, you'll have to figure out how much your customer is willing to pay for your product and charge that.
- That leads us to, Two. When you're trying to figure out how much your customer is willing to pay for your product. [00:11:00] Try asking these four questions about your product or service: At what price do you think it’s so expensive you would never consider it? At what price do you think it's so cheap, you think the quality couldn't be good? At what price do you think it's starting to get expensive, but you might consider it? And at what price do you think it's a bargain?
That's it for this episode of This is Small Business Minisodes, brought to you by Amazon. If you liked what you heard, make sure to subscribe and tell your friends about us by sending them a link to this episode. And we would love to know what you think, so leave us a review on Apple Podcasts. It's easier to do it through your phone. Or send us an email at email@example.com with your thoughts.
Until next time – This is Small Business, I'm your host Andrea Marquez -- Hasta luego -- and thanks for listening!
CREDITS: This is Small Business is brought to you by Amazon, with technical and story production by JAR Audio. [00:12:00]