I write often about pricing because there is very little good guidance out there for entrepreneurs to understand how best to set their prices. Common practice is to price your product or service in the same range as your competition. Is that good practice? Safe, perhaps, but maybe not as profitable as it could be.
Reuben Swartz writes Dollars and Sense: The Pricing Blog, and yesterday he wrote Why Starbucks Coffee is Cheap. “What?” you say. “They charge $4 dollars for a cup of coffee!” Well “cheap” depends on what customers are really paying for. If customers are buying Starbucks coffee for the caffeine, it’s a better deal than Diet Coke. Check out Reuben’s post for the math, if you question this, but his point is absolutely relevant:
“In other words, if caffeine is what you want, and you want it in volume, Starbucks is your low-cost provider. If you can figure out what your customers value and then figure out a way to offer them more of it than competitors, you should be able to command a higher price.” And this is what value pricing is about.
OK, understanding your value isn’t as simple as checking competitors’ pricing. It will probably take testing several hypotheses with real customers to find out what they value. But if it means you really can command a higher price, it’s worth it.