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Pricing is the eternal challenge.

How can you get honest, accurate answers about how much customers might pay, i.e., what is the value of the product/service to them in dollars?

What I've considered (and problems with each):

1. Ask the customer. But you can't ask directly because they may be trying to "game the system" (i.e. lying to affect the outcome). If you ask them "what would you pay?" they may answer high, hoping to encourage you to build it. Or they might answer low, hoping to keep the price low.
2. Put up ads to dummy pages with a price I'm not sure this will work for our product because it's not an impulse purchase. Most customers need to try it, see how good it is, realize that there isn't a cheaper place to buy it or a cheaper alternative.
3. Find a comparative solution and set your price relative to that. For exampple, if you "replace" a gym and a gym costs \$50/month then you price it around there. That gets you within an order of magnitude but it's much more complicated. Even the gym example isn't an analogy because there are other factors:
• Gym is more social
• Home gym requires space (that may be unavailable)
• Gym costs "windshield" time
I suppose you could try to tease out why they like it and what their alternatives are. So addressing #3 but really teasing out all the constituent pros and cons.
• Is this pain (problem) significant to you? Do you wish it would go
away?
• What are you doing to solve it now?
• Ask about other existing solutions and whether they seem expensive, cheap, a good solution, etc.

and here are a couple of resources:

Pricing category on Andy's blog:

• Pricing seems like solving simultaneous equations in math(s), as there are so many factors. Don't forget to factor in some kind of "cost-plus" calculation, as you need to make a certain margin to be viable. You also need to consider "value-add", because the price is really the value that the customer extracts. It is complex, because each customer extracts different value, but you should be able to segment them into value-bands. – Steve Jones 7 years ago
• @ Steve, what the customer will pay is based on *their perception* and our cost rarely enters into that. However, you obviously can't charge less than your incremental cost unless this is a loss leader (trying to "buy" market share). All of that is somewhat moot here b/c it's software and our incremental cost is very very low. – Clay Nichols 7 years ago
• @ClayNichols is right: The customer's perception is what he will pay for. The best example is the iPhone: You all know Apple has somewhat like 50% marge on it - but we buy it for the high price. Your first sentence is that price is "the eternal challenge" - it is a challenge, but the eternal challenge is value. You should watch some videos with Guy Kawasaki ;) – Simonthesorcerer 7 years ago
• @simonthesorcerer, Excellent point. There are really two issues here: How do do you increase perceived VALUE to the customer (not covered here) and How do you measure that Value in \$ (find out what they are willing to pay for the value they place on it.) – Clay Nichols 7 years ago
• "...because the price is really the value that the customer extracts." Glad you guys agree with me, even though you seem not to ;-) – Steve Jones 7 years ago

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If you're targeting low income people, then the price difference between you and a competitor is very relevant.

If you're targeting the middle class, then as long as the price is within the same magnitude as the competitors, then it boils down to convenience (eg how close is it to where they live / work), services offered, etc.

If you're targeting a niche (eg body builders) / upper class market, then you can push the price quite a bit and enforce some kind of exclusivity via price.

Start of with one price that's competitive and on par with competitors, then track the number of signups you get per month. After a certain period of time, increase the price for new signups and see if people run away (if your existing members covers your running cost, then doing this experiment shouldn't be too critical).
Draw two curves, one for loss of income due to people running away or less people signin up, this should increase exponentially as you increase the price. The second curve should show how much more money you're generating with the increase in price than on the original price. Then you can slowly increase the price up to just before the point where you see your losses of not getting new signups is becoming more significant than the increase in revenue due to price increases.

Obviously, if they try and negotiate the price with you saying that you're more expensive than xyz, then at least you still have a lot or bargaining power to drop the price to not lose the individual.

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Asking the customer is useless, even if they are not trying to game the system there is a lot of research that shows the answer is more dependent on whatever they were doing (or thinking about) before you asked than the actual service.

Offering different prices to see if people click is nice but can get you into (probably a little bit of) trouble if the same person sees two different prices.

I suggest just starting somewhere, select a price based on:

1. Your costs (including customer acquisition costs) - this should not be the deciding factor but obviously you should choose something that let you make a profit.
2. Competitors costs - selecting something in this range is a "safe" starting point.
3. Value for customer - this is the most important factor, if you save a business \$1000 per day than \$50/month is way to low, if you sell just about anything to indevidual consumers \$50/month is way too high.

Just pick a price and go with it, after you start getting customers its time to start raising the price until people stop buying :-)

• I think a variation on #3 can work but it's tough for CONSUMER customers b/c they can be irrational. You might save them a 60 minute round trip drive and they place \$0 value on that. (Just look at home grocery delivery). – Clay Nichols 7 years ago
• @ClayNichols - 1. all humans are irrational, you should accept this and even use this for your advantage (I highly recommend Dan Arieli's books on the subject) 2. I have no idea what you are selling but if it's software and you want to make money you should only make software for businesses, I've tried to sell consumer software in the past and I'm never never never going to do this again. – Nir 7 years ago

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What people say and what people do are often very different, so I don't see 1) working.

2) might possibly work. But it is expensive and time consuming to get traffic. You don't want to waste that opportunity on dummy pages.

3) doesn't take account of the complex (and often) irrational psychology of pricing.

I guess the best you can do is to price based on your gut, then add a bit (most people underprice) and then periodically vary the price and see what effect this has on profits.

• That's what we did for 17 years, so glad to see that I wasn't missing some "magic trick" – Clay Nichols 7 years ago