Cost doesn’t equal pricing

Hi there 👋,

If your product costs X to make, you’ll likely charge X plus a little extra profit. That’s how business works, right?

Wrong.

Too often, brands set up their pricing based on their costs or their competitors.

But your competitors don’t know what to charge either; it’s just the blind leading the blind.

And just because your product costs X to make, it doesn’t mean that customers are willing to pay above that.

I’m not saying that these things shouldn’t feed into your decisions surrounding pricing.

But you can’t just assume that customers are willing to pay this much for your product.

So how can you find that out?

You know your value, but do they?

They’re the ones paying for your product. It doesn’t matter how much you or your competitor think your product is worth, you’re not the ones purchasing it.

Part of that issue is understanding the value. You know the value and so you know it’s worth that much, right?

But if your customer doesn’t understand that value, they won’t pay for it.

You need to recognise what drives value and how your customer can understand that.

Additionally, you need to pinpoint the price associated with that value, as it might be lower than you expect.

How much does someone value a healthy meal replacement?

How badly do they want to improve their sleep quality?

Until what price do we value sustainability over affordability?

One way to explore this is to test conversion rates at different purchase levels, by running ads or emails. This shows you how it differs per level. If you haven’t launched your product yet, this can apply to pre-orders.

But this is an expensive way to achieve this, so let’s explore a more budget-friendly method.

How to calculate your perfect price

Let me introduce you to your new best friend: the Van Westerdorp Pricing Model.

Officially, this is for new products, but there’s no reason you can’t apply this logic to your existing business.

Start by finding a pool of people to ask. It could be potential customers or strangers to your brand, just ensure they’re your target demographic.

Explain your product, and then ask the following questions:

• At what price would it be so low that you start to question this product’s quality?

• At what price do you think this product is starting to be a bargain?

• At what price does this product begin to seem expensive?

• At what price is this product too expensive?

The answers will allow you to form a range of what potential customers are willing to pay, and with that, what you can charge.

It’s important to first ensure they understand your product so that the results are accurate.

Then this is truly what they’d pay for that value, not more, not less.

Ideally, you’d aim for 300-400 responses. But let’s be realistic and say that 100 responses will provide a rough estimate of your pricing range.

It’s not the same as intent, which you’d get through the earlier method of testing conversion rates on different prices, but it’s better than simply copying competitors or taking a wild guess.

Recommendation

In every edition of Growth Waves, I also share a related book, individual or newsletter to check out related to the week's topic.

Take a moment to read this thorough Forbes article on the Van Westerdorp Pricing Model.

It covers the pricing issue prevalent in business and how this model can help to combat that.

If you’re looking to test this out yourself, check out this excellent survey template from Survey King.

It implements ranges so users can’t mix up their lowest prices and highest, for the most accurate results.

It’s easy to think that customers are the problem.

They don’t understand the costs that go into your product. They don’t recognise the value they’ll receive from it. They’re willing to pay this money for other things.

But if your customers don’t recognise these things, then you’re doing something wrong.

Whether that issue lies in your pricing or value, that’s what the Van Westerdorp Pricing Model can help to pinpoint.

If you think it is a value issue: work on that and then use the Van Westerdorp Pricing Model to test again if it has changed.

We know the health benefits of a green juice and the cost of ingredients that go into one… yet we still don’t want to pay a lot for it.

Ensure your product is something they’re willing to pay for every single time.

Daphne