How to Price a Product
In 1799, a 12-year-old boy by the name of Conrad Reed stumbled upon a large yellow rock resting in the churning waters of a river outside his house.
Intrigued, the boy fished out the rock and showed it to his father John Reed, a poor North Carolina farmer. While John found the yellow rock to be out of the ordinary, he assumed it wasn’t worth much, and for the next three years the heavy stone was used as a doorstop in the family’s farmhouse.
Eventually, John’s curiosity got the better of him and he took the rock to a local jewel dealer to see what it was worth.
That day, the jewel dealer bought the 17-pound gold nugget from John for $3.50 and later sold it for $3,600.
When John found out that he had been swindled, his infuriation inspired him to start a gold mine… which years later sparked America’s very first gold rush.
For John Reed, mistaking a 17-pound chunk of gold for just a pretty yellow stone cost him what today is worth $60,000. Fortunately, John had some fire in his belly and this mistake led him to become a very wealthy man.
But, the difference between John and many of today’s freelancers, creatives and entrepreneurs was his ability to correct course after undervaluing his product.
Many people selling things today make two mistakes when it comes to product pricing –– (1) they overvalue their product, thinking they have gold when they actually have fool’s gold or (2) they undervalue their product, thinking they have a yellow rock when they actually have gold.
In either case, they are going out of business if they don’t figure out the right amount to charge for what they are selling.
How to Price a Product Calculation
In this section, we are going to use a fictional company as an example. It’s going to be a startup called “Kitty Caps” that sells knitted hats for cats.
We are going to take Kitty Caps through a few questions that will help them determine their product pricing.
1. Who values my product the most?
Kitty Caps needs to find the group of people that value their products the most. When doing this, there is only one rule –– this group of people can’t be friends or family.
While Kitty Cap’s Cat Hats are worthless to dog owners, cat lovers would spend the last dollar in their pocket to buy one.
Cat owners are the group of people that value Kitty Cap’s products the most, and in turn, they should be the target market.
*** Product Pricing Lesson #1 –– Some business owners think they have a worthless product because they are selling it to the wrong people. Find your cat lovers and invest all of your time and energy in selling to them.
2. Will the people who value my product most, actually buy my product?
Kitty Caps now needs to figure out if their target market (cat lovers) will actually buy what they are selling. If cat lovers don’t want to buy their cat hats, their product sucks and they need to either improve it or create a new product that their target market actually wants to buy.
In order to determine whether or not their product is valuable, Kitty Caps needs to approach 25 cat lovers and ask them to buy their cat hats.
They aren’t going to name a specific price, they are just going to say, “pay what you think it is worth”.
If everything goes as planned, Kitty Caps sells cat hats to 20% of the cat lovers they talk to. But, as long as it is in the 10%-20% range, Kitty Caps knows they have a valuable product that their customers are interested in.
***Product Pricing Lesson #2 –– Many marketers will tell you to conduct customer research by asking people within your target market how much they would spend on your product. But here is the thing, saying you will buy something and actually buying it are two totally different things (unless we are talking about Girl Scout Cookies). Ask the people within your demographic to buy your product and see if they do.
3. How much are people willing to spend on my product?
Now, the fun part begins. Kitty Caps gets to determine how much to charge for their product.
A good rule of thumb here is the 25% rule. Kitty Caps is going to test three pricing structures –– they are going to (1) charge 25% less than they want to charge, (2) charge 25% more than they want to charge and finally (3) charge exactly what they want to charge.
Let’s say Kitty Caps wants to charge $25 a hat, their three pricing structures would look like this ––
They should ask 25 cat lovers if they will buy their cat hats at approximately $18.75 (–25% their original asking price).
They should ask 25 cat lovers if they will buy their cat hats at approximately $25 (their original asking price).
And, they should ask another 25 cat lovers if they will buy their cat hats at $31.25 (+25% their original asking price).
Now, let’s say 14 people buy the cat hats at $18.75… 9 people buy the cat hats at $25 and… 5 people buy the cat hats at $31.25. Kitty Caps will be making the following revenue from these pricing structures ––
Pricing Structure 1 ( –25%) –– $18.75 x 14 = $262.50
Pricing Structure 2 (normal pricing) –– $25 x 8= $200
Pricing Structure 3 ( +25%) –– $31.25 x 4= $125
After adding up these results, it is pretty clear that $18.75 is the price cat lovers find Kitty Caps product the most valuable. And at each cat hat only costing $5 to knit, Kitty Caps is still marking up their product 375%.
*** Product Pricing Lesson #3 –– Don’t get greedy. Just because you think your product or service is worth more, doesn’t mean that your customers think so. At the end of the day, it’s more important to admit you are wrong about your pricing and sell more than to be stubborn about what you charge and sell less. When it comes to business, the ones that make money succeed.
Final Thoughts on How to Price a Product
It's also important to keep in mind that product pricing is going to change. If your product becomes more popular you are going to charge more. If your product becomes cheaper to make, you may decide to charge even less.
Ultimately, just remember to charge what your target market thinks your product is worth –– not what you think you are worth. After all, this was what got Mr. Reed in trouble back in 1799.
How to price a product? Know what your product is worth and you will have the perfect product pricing.
By Cole Schafer.
You gotta check this out -- Sticky Notes is my email list reserved strictly for entrepreneurs and creatives looking to sell like a Florida Snow Cone Vendor on the hottest day of the year.