A frequent dilemma for many startups. “should we charge more for the product?”
I too face this question often. Here is how I find out the correct (well, almost) answers to the question and profit.
When in doubt, Test
Testing is my favorite way to find the answer. Although I never ran split tests on price, I did test by launching expensive products or adding expensive variants. Both times my intuitions were proved wrong. (I thought no one would buy, but the test proved otherwise).
For example, soon after opening 3rd batch of Excel School training program, I received several requests for adding an option to learn Excel Dashboards. I was in two minds whether to include them or not. So on trail basis, I announced that all Excel School students will get 2 hours of dashboard training as a one time bonus. The response to this was very good. More than 350 students signed up for 3rd batch of Excel School.
So while running that batch of classes (between September – December 2010), I created a lesson plan for an all new module on dashboards. And then, I launched that in Excel School next version in Jan 2011. I priced it almost double ($197 as against $97 for normal excel classes).
Now, more than 60% students join under dashboards option. So, even though, I had fewer students (about 300) than earlier batches of Excel School, I have more money in the bank and feeling lot better.
How to test?
- Sign-up for a free account with Google Website Optimizer. You can very quickly create variations of sales / sign-up / landing pages and then tell google to split incoming traffic to the variations. You can set some goals and observe how well people are converting based on the variation they visit.
- Just do it already! For a week, switch pricing, options or any other thing you have in mind. See if the responses are more or less in comparison to what you normally get.
When in doubt, Ask
You may worry about the implications of pricing tests or creating costly products. A better and cheaper alternative is to ask. Just run a survey and ask if your prospects would be keen to purchase the product.
For example, just before launching my first excel crash course product on dashboards, I ran a small survey asking if my readers would be interested in such a product line (excel crash courses). I got several enthusiastic responses. Instantly I knew what to do.
How to ask?
- Write a simple blog post or send a newsletter: When it comes to asking, you should not beat around the bush. Just send an email to your prospects or post in your blog about the idea and gauge the response.
- Run a survey: Surveys are excellent way to gather feedback or opinions. You can setup a simple google form and post it on your site.
- Do not ask unqualified customers: This is important. No matter what your idea is, do not ask people who will not be your customers. That means, you should not offer any free gift for completion or send the survey to your grand-mother.
Find the value of your product
Often while creating a product, we find the cost of it and then add margins to arrive at price. This approach may fail you if your company grows and the overhead increases. Also, you might price a product too low (or too high).
Finding the value of your product – an example:
A better approach is to find out how much your product is worth for your customers. Lets say your product is aimed at carpenters to send invoices. And you assume that it saves them about 1 hour every week. If you go by the hourly rate of carpenters that is about $50 per week (or $200 per month). Now you know the value of your product. You can then factor in various things like,
- how much time your customers need to learn and use your product
- what additional activities they need to do because they are using your product
- any switching costs involved
Once you factor in all these things, you will know the true value of your product. Just charge 50% of it as the price (or even less if the competition is huge) and you should be good.
From my experience:
For example, when I created my first e-book, I blindly priced it at $5. After 2 months of selling, I only made a couple of hundred dollars. So I decided to try out a different price. I upgraded the book and changed its price to $10. Suddenly the sales jumped up. This is because people perceived the product as high value. But when they saw the price at $5, they felt discouraged. Now, after 2 years of releasing it, I make about $200 each month from it.
Give Options to Customers
If you are not sure whether the high price will fly, just create 2-3 variants of your product and give options to your customers. For example, I have 3 variations in Excel School ($67, $97 and $197).
Once you convert a customer, you can always offer them an upgrade if they want to pay you more.
How do you decide how much to charge?
There is as much art to product pricing as there is science to it. I do not have any ground rules for it. I price my products in such a way that they seem excellent value for money to my customers.
What about you? How do you go about pricing? What ideas and techniques do you use? Please share using comments.