Setting the right price is hard. It’s easy to be too cautious and set a price that isn’t profitable in the long run. On the other hand, a too high a price can scare away potential customers. However you approach it, the guiding start should always be the value that a potential customer perceive in your product.
Always remember. It is the customer – not you – who defines what value is, and it has nothing to do with material cost or the number of hours you need to spend on the project, which this example illustrates well.
You need to have a wisdom tooth removed – a procedure you’re not looking forward to. You ask two dentists, and both say it will cost SEK 3,000. One estimates the job will take one hour, the other says he’ll be done in 10 minutes. Suddenly, less time has become more valuable.
Because value is a perception, you can increase it at a reasonable cost with the right communication and the right combination of product and services. A fascinating example is Husqvarna’s robotic lawnmowers. A popular feature is the app that allows you to control the mower with your phone. But why? After all, you bought a robotic mower so that it would mow by itself. Rationally, that’s true – but on the other hand, it’s also pretty fun to race slalom or do precision driving with your friends over a beer…
In a previous post, we discussed the value of increasing the price by 1% (8% increase of your bottom line…). The same applies when setting prices for your product range. The rule here is simple: Never be afraid to include an option with a super-premium price. Here’s a simple example.
You’ve just opened a small bistro. At the beginning, you offer two white and two red wines. One wine costs SEK 300 per bottle and the other SEK 500. The distribution between the wines chosen by customers is about 50/50. When you sum up the first month, you’ve sold 100 bottles for a total of SEK 40,000, i.e. SEK 400 per bottle on average.
You’re now considering expanding the selection with another wine but are wondering which price range to aim for. You know that people in a choice situation tend to choose the middle option. You therefore expect that 25 will choose the cheapest, 50 the middle, and 25 the most expensive. The consequences of different alternatives are:
- You add a wine for SEK 200. Your revenues will be 25 × 200 + 50 × 300 + 25 × 500 = SEK 32,500, or SEK 325 per bottle. You’ve thus lowered both total revenue and the average revenue per bottle.
- Instead, you add a wine for SEK 750. The calculation then becomes 25 × 300 + 50 × 500 + 25 × 750 = SEK 51,250. You’ve thus raised the average revenue per bottle of wine to SEK 512.50.
In all business, it is often a good strategy to add new options at the top of your offering since it will lift the average revenue. If you want to take the above example to the extreme, as a restaurant owner you should also add a wine for SEK 2,000. Very few will buy it, but suddenly the wine for SEK 750 looks a lot cheaper…
Do you want to know more about value creation, just reach out to ulf.vanselius@comprend.com