Your Pricing Should Be Free or Ultra Expensive (And What To Do If It’s Stuck In The Middle)
Anything in the middle feels like something for no one.
Dear Friend, Subscriber, and Category Pirate,
This week’s Category Design Tip delivers the cold, hard truth about pricing strategies.
In a world where companies try to nickel and dime each other to death, “price” almost always becomes a race to the sides. You are either expensive, luxury, premium, or you are bulk, cheap, value pack. Anything that sits in the middle of its given category ends up feeling like something for no one.
But when you price for your Superconsumers, instead of all consumers, you change the way people value what they value—and the way your product is valued.
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Most Companies Think About Price In One Of Two Ways
The first way is cost plus: “What does it cost to make what we offer, what profit do we want to make, and what price can we get away with?”
But this is a very self-centered way of pricing. It’s an important consideration to include, but it shouldn’t be the driver of your pricing strategy.
The second way most companies price is benchmarking versus competitors.
This is a completely reasonable and worthwhile question to ask, but the answer tends to lead down the insane road of comparisons. If most other “competitors” price themselves at $X, companies assume their best path forward is to price their product or service similarly to $X.
The logic here is two-fold:
Competitors have already done the hard work of figuring out what customers are willing to pay, and you would be smart to follow in their footsteps.
If it costs you $50 to make a product, then charging $75 or $100 “seems reasonable.”
But, as we share in our mini-book The 8 Category Levers, these are the biggest mistakes you can make when pricing your product or service.
Instead, you need to ask two radically different questions:
How much value does my category create, especially for my Superconsumers?
How much value is created or destroyed by the way I price, specifically “who I charge,” “when I charge,” “where I charge,” and “why I charge?”
We’d also like to introduce you to a third way to think about price.
Instead of looking at how much your competition thinks their product is worth, ask, “Who are our Superconsumers, and what does our price say about them?”
Superconsumers Are NOT Price-Sensitive
Supers have emotional and aspirational connections to the products/services they love, so they are usually willing to spend more overall AND pay a higher average price per unit.
Before YETI, people would buy a Coleman for $75 to $125. And when YETI started charging $1,000 per outdoor cooler, they framed a new level of value in the “premium cooler” category they designed.
A regular consumer of “scissors” might only spend $5 in the category over the course of a few years. But a Superconsumer of “scissors,” might spend upwards of $100 on scissors—maybe even $100 per month—for scissors with different handles and lengths, for different kinds of projects, etc.
If you were an Italian sports car fanatic and a new business came along and said, “It’s like a Ferrari but only costs $60,000.” You wouldn’t be intrigued. You’d be insulted. And on some level you would say to yourself, “I’m used to spending far more because I value the things I love.”
When you price your products and services through the lens of your Superconsumers’ wants, needs, and desires, you’ll discover they are willing to pay a premo-premium for the things they just can’t get enough of.
So ask yourself: What do my Supers find most valuable, and how much would they be willing to spend for that delight?
They’ll pay accordingly.
Price anchored to your Supers means pricing your product or service outside of the expectations of the everyday consumer.
This is how you achieve radically different pricing.
Remember, price isn’t just how much money the customer spends, or the profit margin you expect to earn. Price can also be a status symbol. Price can be a differentiator. Price can be a statement about your company and product, and about the people who buy it, use it, wear it, and tell other people about it.
For example, how much would you pay for a piece of luggage?
Would you pay $299 for two pieces of Samsonite luggage?
Would you pay $645 for Away’s aluminum luggage with a power bank?
Or would you pay $4,850 for monogrammed “My LV Heritage” luggage?
If you’re a Superconsumer of luxury fashion, you won’t think twice about the first two options—the Louis Vuitton piece is worth the price.
The Simple Pricing Equation
The best way to figure out your pricing is to use this simple equation:
Value = Benefits/Price
Price should always be a reflection of the Value (V) you are able to provide when the Benefits (B) are divided by the Price (P). Keep in mind, value is 100% perception. Nothing is “valuable” until someone teaches someone else how to value it. We get taught to value certain things and devalue others.
When a company can show a big difference by playing with the V = B/P equation, radical pricing has been achieved.
A few examples of this would be:
Increasing Benefits as much as possible, and Price enough to maintain the ratio
Increasing Benefits as much as possible, but lowering Price for an exponential growth
Keeping the Benefits/Price ratio the same but at very different “absolute” price
But there is one rare pricing situation that will launch your category to new heights, which we share in our mini-book, The 8 Category Levers.
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