Why does somebody pay 3-5 times the price for some brands of water over others? Why some MP3 players are 5 times more expensive than others and still preferred? Why do some laptops cost you 6-7 times they competitor equivalents and sell more? I am sure you are recognizing the brands I am referring to here – Evian / iPods / MacBooks? Why are some seen to be value at premium price points while others are seen as expensive at lower price points? Pricing seems to have been linked to branding and this has led to many entrepreneurs miss the philosophy of pricing totally!
Arriving at the right price is always a tough call for every entrepreneur. This results in almost every entrepreneur becoming a Good Samaritan! I know the world requires a lot more Good Samaritans’ but entrepreneurs becoming them that too unintentionally seems like they are being exploited on their ignorance. This is not very good for society as a whole. All of them end up leaving a lot on the table and then worry about scaling with limited ‘gross margins’. Further, if cash flows don’t aid them, most of them die a premature death. While they attribute this to their bad business sense or poor business models, the real problem is in price or cash cycle design.
The first aspect about pricing that entrepreneurs need to understand is that ‘price’ has to be discovered and not set. While every entrepreneur (especially the technical ones) create models and do a lot of mathematical magic, they invariably end up selling at prices close to what the customers feel comfortable. Almost every time this is either a ‘cost plus’ model or a ‘peer price’ model, both of which do not bring out the real worth of the product / service. The sad part is that many entrepreneurs do not even recognize this flaw!
While all of them are startled when I reveal this to them – the biggest take away from the discussion (either at a workshop or a mentoring session) is that ‘price should not be set’ – it has got to be discovered. The revelation about this is so large that the immediate effect is to hire me (not joking) to help arrive at the real worth of their product / service! Many of them believe that I have some secret tool that will give the answer quickly. When I detail the process that entrepreneurs must take to discover this ‘right price’ they are overwhelmed at the effort they have to invest (more than my cost). Many times our advisory / mentoring sessions have helped start-ups find the close to ideal price points. But the joy of finding the real worth of their product and the pain they experience of figuring out how much they have undervalued their products / services can best be explained only by them.
While I continue to share a few more blog posts on pricing, the very first lesson that I want entrepreneurs to keep in mind is that – the best way to find the right price for their product / service is to discover it and not attempt to set it!
Think on this as I build a case to help you discover the right price for your product over a series of blog posts.