When you’re first starting your business, understanding what customers are willing to pay for your product or service can be a real challenge. If you price too low, you’ll lose interest, but if you price too high, you’ll lose appeal.
That’s why we asked 10 entrepreneurs from Young Entrepreneur Council (YEC) the following question:
“What is your best advice for a founder who is trying to determine how much customers are willing to pay for a product or service?”
Here’s what YEC community members had to say:
1. Understand the Indirect Competition
“How you should price a product varies dramatically between B2B and B2C offerings, but what most founders overlook is the indirect competition vying for their customer’s dollars. Customers don’t compare products and services in a vacuum, they compare offerings not only in your vertical but outside of it. Find out the common indirect competition and understand how you compare.” ~ Nick Reese, BroadbandNow
2. Split Test and Validate With Actual Customers
“Pricing is an important decision that should be made leveraging data, not guess work. Create a landing page that describes your product and it’s price. Also include a credit card entry form. Then, use an A/B testing tool to display different prices to different subsets of users. See how many credit cards you collect from each of the different price points (but don’t actually charge the cards).” ~ Jonny Simkin, Swyft
3. Break Out Tiers
“Tiered pricing is a simple way to find out which features are most valuable as well as which price points are going to drive the highest conversion rates. While many first-time customers will gravitate to the “cheapest” package, offering upsell packages to existing customers through segmented market automation can allow for testing different price points without having to publish prices publicly.” ~ Dan Golden, Be Found Online
4. Use Bottom-Up Pricing
“I’d rather get customers paying at a lower price but paying than have too high a price point and zero customers coming in the door. Start by asking a few customers a fair price. Once they sign up, keep raising the price for new users until you notice that the percentage of people singing up is decreasing. That’s when you know you’ve hit your right pricing structure.” ~ John Rampton, Due
5. Ask for the Sale
“You’ll never know how much someone will pay until money changes hands. Many founders make the mistake of asking people how much they would pay for something. Theoretical spending answers do not reflect reality! Instead pre-sell your product or service by actually asking for the sale. You’ll quickly find out how much people are really willing to pay.” ~ Laura Roeder, MeetEdgar.com
6. Don’t Underprice Products
“If you sell a product (as opposed to an automated online service), price it as high as you can get away with so you still have enough people willing to buy it. You can always come down on price later as your efficiencies improve. Look at your competition, and don’t try to undercut when starting out. Just make a better product.” ~ Wei-Shin Lai, AcousticSheep LLC
7. Determine Desired Profit Margins
“It doesn’t matter what customers are willing to pay if margins don’t cover expenses. It’s important to understand the costs involved in building, servicing and selling a product/service before determining the price. Once that’s done, see if customers are willing to buy. If not, then the product isn’t a good fit at the price, needs to be improved or the inputs to cost of goods need to be reduced.” ~ Mark Cenicola, BannerView.com
8. Connect Yourself to the Right People
“Identify your ideal customer, and do what it takes to get them in the door. If you connect yourself to the right kind of customers, success breeds success, and you can begin increasing pricing as your experience and customer base grows.” ~ Lindsay Mullen, Prosper Strategies
9. Find the Right Anchor
“Read “Priceless” by William Poundstone, and get familiar with the concept of price anchoring. In short, people really don’t have any clue as what something “should cost.” They often decide based on clues (or anchors) that are immediately available on the spot when making the purchase (like the price of theproduct sitting on the shelve next to yours). Take advantage of this and anchor right.” ~ Juha Liikala, Stripped Bare Media
10. Focus Geographically and Demographically
“You have to search geographically and demographically to see who you are targeting. It really comes down to finding the sweet spot of not too high and not too low, so it takes the right amount of research to figure out just exactly where your product or service will be worth their money, convenient enough and worth it.” ~ Josh York, GYMGUYZ
Price Tag Photo via Shutterstock
