A guy I met a while back used to be a drug dealer in another country, a long time ago, back when he was a young man, (He as since gone into IT which makes a twisted sense).
We were talking about pricing strategies, and he told me that he had back in the day, the best way to know when his pricing is right where it should be and he knew that he was cutting the best deal when selling.
First off, we all agree that pricing is not an easy thing to do for most of us.
People have all kinds of theories about how to set pricing, and how they know when they have the right price to still sell yet make the most profit. Every system feels like guess work, and no one ever says they had it perfect, but this system made sense.
Some people just care to match what others are charging, basically match the market, but that is dangerous, because you don't have a system or a methodology, and what is the difference between you and the competitor? If he has better margins than you, your business is in trouble.
You need to know what the customer is willing pay, and to do that, you have to know and think like your customer.
Other businesses price just below others in the market, again, dangerous, as it just gets you those customers that care only about price, which means that you will lose them easily when someone else has a lower price.
This is not a long term strategy.
Works if your margins are better than everyone else's margins, but I wouldn't bank on it, as there is always someone out there who will compete. Any time your strategy is to be smarter than everyone else, you have a problem. There is always someone smarter than you out there.
Trust me, someone is always willing to give them a lower price. You just end up in a price war that no one wins.
There are theories of how to price, but the key to remember is that price is fluid, and that what you are selling on changes in value depending on who you sell to and their situation.
How your customer views the product and how he uses it, and your customer's individual situation determines that customer's price. The cookie cutter one price fits all model doesn't work, and it just leaves money on the table.
Which leads us back to the drug dealer.
My friend told me that he always asked questions about his customers, and he knows their history, their likes and dislikes, which considering what he was doing was illegal back then, was a smart play.
You only do business with other people you know well and trust, and he told me that when he discussed price, he asked them what was going on, what they were doing, and by that, got an idea where their mind was at, and then gave them a price, always slightly higher than what he felt was the market.
He would sell the convenience factor, remind them of the trust between them, as the customer didn't want to keep looking, and the customer sure didn't want to have to find a new source, which is a time consuming process, and in this case, also might possibly be something that could get you put in jail.
My friend said when he gave a price, if they took it right then, he knew he had priced too low.
He was really happy when they hesitate and then say they have to think about it, and then they hang up.
I ask him, you are happy you lost them?
He said, I didn't lose that, I am happy because that is what you want, to know that the price you quote to them is close enough to make them want to buy right then, but just over what they wanted to pay, so that they say they have to think about it.
Then they call up twenty minutes later and take the deal.
When that happens, you know you got the most money you could out of that transaction.
Another point of the story, there are business lessons everywhere, listen to everyone. I do.
Drop me a note, say hello.
One of the first mistakes budding Makers make when they start to sell their product is not charging enough. It’s easy to see why, for all sorts of reasons. They want the product to be popular, and they know the lower the price, the more it will sell. Some may even feel that if the product was created with community volunteer help, it would be unseemly to charge more than it costs. Such thinking may be understandable, but it’s wrong. Making a reasonable profit is the only way to build a sustainable business. Let me give you an example. You make one hundred units of your delightful laser-cut handcrank toy Drummer Boy. Between the wood, the laser cutting, the hardware, the box, and
the instructions, it costs you $20 to make each one. Let’s say you price them at $25 just to cover any costs you may have missed, and start selling.
Since it’s a fun kit and pretty cheap, it sells quickly. You suddenly realize that you’ve got to do it all again, this time in a batch of one thousand. Rather than putting up a couple thousand dollars to buy the materials, you’ve got to put up tens of thousands of dollars. Instead of packing the kits in your spare time, you’ve got to hire someone to do it. You need to rent space to store all the boxes, and you’ve got to make daily trips to FedEx. Now your hobby is starting to feel like a real job. Worse, the popularity of your kit has come to the attention of some big online retailers, and they’re asking about buying in batches of one hundred, with a volume wholesale discount. You’re thrilled that your kit is so popular and flattered that these retailers, who can reach many more people than your own website, want to sell it. But if you’re selling it at $25, that’s the market price—the retailers typically can’t sell it for more. The retailers ask for a lower price because they need to make their own profit on each one, usually around 50 percent. So they need to buy them at no more than $17 each. But that would mean you are selling each one at a loss! Your costs, which were once within the limits of hobby spending, are now at risk of driving you and your business into debt. What entrepreneurs quickly learn is that they need to price their product at least 2.3 times its cost to allow for at least one 50 percent margin for them and another 50 percent margin for their retailers (1.5 × 1.5 = 2.25). That first 50 percent margin for the entrepreneur is really mostly covering the hidden costs of doing business at a scale that they hadn’t thought of when they first started, from the employees that they didn’t think they’d have to hire to the insurance they didn’t think they’d need to take out and the customer support and returns they never expected. And the 50 percent margin for the third-party retailers is just the way the retail market works. (Most companies actually base their model on a 60 percent margin, which would lead to a 2.6x multiplier, but I’m applying a bit of a discount to capture that initial Maker altruism and growth accelerant.) In other words, that $20 kit should have been priced at $46, not $25. It may sound steep to you now, but if businesses don’t get the price right at the start, they won’t be able to keep making their products, and everyone loses. It’s the difference between a hobby and a real, thriving, profitable business.
Makers: The New Industrial Revolution by Chris Anderson
To create something that takes hours to create and then sell for pennies is to destroy any chance you have. Value your time.
Discipline matters on cash flow, particularly where money is tight. You will want to spend the extra, but remember that you are generating money from the system you have the products you sell, from what you already own, and since you need money to grow, you need to spend less on things that do not generate income. For every dollar you spend you need what you bought to make two dollars or more. You have to keep the machine running. Once you are ahead, put some aside for any future issues or growth, returns, system problems, etc. Always be looking for new opportunities, and always look for a way to make more and spend less. The best solution is something that you can make that is low cost to produce and low cost to ship and most importantly, people want. You can make more money, you can find new things to sell, but you cannot get more time, it is infinitely valuable. To create something that takes hours to create and then sell for pennies is to destroy any chance you have. Value your time.
Principle 1: Base Prices on Benefits, Not Costs
In Chapter 2, we looked at benefits versus features. Remember that a feature is descriptive (“These clothes fit well and look nice”) and a benefit is the value someone receives from the item in question (“These clothes make you feel healthy and attractive”). We tend to default to talking about features, but since most purchases are emotional decisions, it’s much more persuasive to talk about benefits.
Just as you should usually place more emphasis on the benefits of your offering than on the features, you should think about basing the price of your offer on the benefit—not the actual cost or the amount of time it takes to create, manufacture, or fulfill what you are selling.
Principle 2: Offer a (Limited) Range of Prices
Choosing an initial price for your service that is based on the benefit provided to customers is the most important principle to ensure profitability. But to create optimum profitability or at least to build more cushion into your business model, you’ll next want to present more than one price for your offer.
The key to this strategy is to offer a limited range of prices: not so many as to create confusion but enough to provide buyers with a legitimate choice. Notice the important distinction that naturally happens when you offer a choice: Instead of asking them whether they’d like to buy your widget, you’re asking which widget they would like to buy.
Principle 3: Get Paid More Than Once
The final strategy for making sure your business gets off to a good start is to ensure that your payday doesn’t come along only once—you’d much rather have repeated paydays, from the same customers, over and over on a reliable basis. You may have heard of the terms continuity program, membership site, and subscriptions. They all mean roughly the same thing: getting paid over and over by the same customers, usually for ongoing access to a service or regular delivery of a product.
(Note: Don’t get too hung up on the exact numbers here. The point is that in almost every case, a recurring billing model will produce much more income over time than will a single-sale model.)
The key to this model is not market share. It’s share of the customer. And to gain more of each customer’s budget, you first have to zealously treat every customer as a “best” customer, no matter which ones actually end up becoming the proverbial “customer for life.”
The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future by Chris Guillebeau
“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.
— Charles T. Munger”
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