If your product costs X to make, you’ll likely charge X plus a little extra profit. That’s how business works, right?
Wrong.
Or what about this pricing strategy: “Company X and Y charge similarly or more.”
When I was Head of Growth this was the feedback I got. I found out that the founder and even last minute increased the price of our main product just before launch.
It made no sense to me. How can you compare yourself to a completely different business and a different product?
Too often, brands set up their pricing based on their costs or their competitors.
But your competitors don’t know what to charge either; it’s just the blind leading the blind.
And just because your product costs X to make, it doesn’t mean that customers are willing to pay above that.
Yes, our product was expensive to make. Yes, our competitors were charging similar amounts, but the feedback was time and time again the same from customers who stopped using it: it was too expensive. They couldn’t afford it anymore.
It resulted in a leaky bucket; we were getting more customers in, sometimes on a discount, and losing them because of price.
For other businesses, I saw the same. This was the price as is and too often founders weren’t open to changing it.
Offer a discount, sure? Consider decreasing or increasing the price for good? Scary.
It made me realise that for startups, price was an underappreciated growth lever. So many startups looked at costs, a few competitors and choose a price to stick with, never reconsidering it again.
I’m not saying that these things shouldn’t feed into your decisions surrounding pricing.
But you can’t just assume that customers are willing to pay this much for your product.
That is why I researched into pricing strategy to find a better way and approach to help startups feel more confident in their pricing.
It starts with:
- Communicating value
- Researching their willingness to pay for that value
- Conducting pricing tests
You know your value, but do they?
They’re the ones paying for your product. It doesn’t matter how much you or your competitor think your product is worth; you’re not the one purchasing it.
Part of that issue is understanding the value. You know the value and so you know it’s worth that much, right?
If your customer doesn’t understand that value, they won’t pay for it.
You need to recognise what drives value and how your customer can understand that.
Additionally, you need to pinpoint the price associated with that value, as it might be lower than you expect:
- How much does someone value a healthy meal replacement?
- How badly do they want to improve their sleep quality?
- Until what price do we value sustainability over affordability?
How to calculate your perfect price
Let me introduce you to your new best friend: the Van Westerdorp Pricing Model.
Officially, this is for new products, but there’s no reason you can’t apply this logic to your existing business.
Start by finding a pool of people to ask. It could be potential customers or strangers to your brand, just ensure they’re your target demographic.
Explain your product, and then ask the following questions:
- At what price would it be so low that you start to question this product’s quality?
- At what price do you think this product is starting to be a bargain?
- At what price does this product begin to seem expensive?
- At what price is this product too expensive?
The answers will allow you to form a range of what potential customers are willing to pay, and with that, what you can charge.
It’s important to first ensure they understand your product so that the results are accurate.
Then this is truly what they’d pay for that value, not more, not less.
Ideally, you’d aim for 300–400 responses. But let’s be realistic and say that 100 responses will provide a rough estimate of your pricing range.
It’s not the same as intent, which you’d get through the earlier method of testing conversion rates on different prices, but it’s better than simply copying competitors or taking a wild guess.
From there you can start testing your pricing.
Testing your pricing
Once you’ve got your range, if it doesn’t match what customers are willing to pay, you can start running pricing tests.
One way to explore this is to test different purchase levels by running ads or emails. If you haven’t launched your product yet, this can apply to pre-orders.Your end success metric shouldn’t be conversion rate: it is likely to always go up with better prices but bottom-line value.
At the startup I mentioned in the beginning, where the theory was that we were charging too much, we did this.
In our case, we did it through discounts. There was resistance to showing different prices and the challenges that we offered the product as a subscription. This isn’t 100% representative, but will show you how your audience responds to different levels.
We took a non-customer list and split it into four random groups: 20% off, 30% off, 40% off, 50% off.
It was so interesting: 20% -> 30%, huge lift in email conversion rate (12% vs 17%), but 40% and 50%? Only a small lift and profit dropped greatly as we were not only losing margin on the first orders but also retention was worse for those audiences.
Now this will partly be the discount (some people buying it for that), but it was definitely a first signal that a lower price could allow us to reach a wider audience and drive more value for the business too.
Sadly, as mentioned, they weren’t open to a permanent change in pricing, but if they were and wanted more confidence I would have suggested running a second test through Meta ads:
- Present the product at 2–3 different price points with similar ads including the current price to make it fair (only change the price on the ad visual, ad text and landing page)
- Ensure it is set as an experiment to reduce the risk that the same audience sees different prices
- Track those cohorts over time to measure the impact of a permanent change
Taking the pricing leap
It is scary to question your prices; it feels so permanent.
This is why I suggest both qualitative and quantitative research first. Just test it and see what happens.
You might even realise you are underpricing and could increase your prices. That happens too. I know of one brand that launched in the United States.
They had already increased their prices a bit to match that market, but the whole launch was a flop. Why? Post-launch research showed that the audience didn’t trust the quality: their price was too good to be true.
If they had run the survey upfront, tested different prices, they could have prevented a lot of missed opportunity.
Don’t just set and forget your price; challenge it and use it to your advantage.
