Pricing is one of the most challenging aspects of running a business. Charging too little means that you “leave money on the table”, but also that customers tend to under-appreciate what you do. Charge too much, and your transaction volume — and total revenue — goes down.
You can try to fnd out what the competition is charging, but you need to understand what value they provide compared to yours for that to be meaningful. You can ask customers what they think your product or service is worth, but being economic creatures, they’ll likely understate in their answers. What that leaves you with is the pricing “method” most businesses use — trial and error.
We’ve all heard about about assigning prices based on value (vs. cost plus pricing). But “value” is in the eye of the beholder. The Cash Flow Blog suggests that you define value in your own terms — the lifetime value of repeat business. The author, Tom Taulli, quotes Gray Chapell, COO of Nightingale Conant: “The best price for us is $39.95. This price allows us to bring in the maximum number of customers who will eventually convert [to] loyal customers through a positive product experience. At that selling price, Nightingale Conant loses about $10 per new customers but makes that loss up over the next ten months to break even. From there the customers who reorder are the ones who help keep us in business.”
Interesting concept! Choose a price that will assure the maximum recurring revenue. I like the idea. But the post doesn’t say how long Nightingale Conant experimented before finding this ideal price, nor how much they may have lost before they arrived at it.
If you’re in business for the long term, it does makes sense to price your offering so you can keep the doors open but also keep your customers back.