Luke Brown Marketing Blog

A common dilemma among business owners concerns how to price a product or service. Price it too low and you won’t make enough to be profitable. Price it too high and you may make very few sales. Here are five pricing principles to help solve your dilemma.

Pricing Strategy 1: The Goldilocks Factor

Some clients have sold information products which converted online at about 1.8% when priced at $14.97, yet had almost zero sales when priced at $9.97 and $19.97.  By rotating in the middle price, the project went from a near-write-off to a tremendous success as people perceived the value to be exceptional.

In the testing phase of 60 day periods, sales at $9.97 were just over $800, sales at $19.97 were about $1,150 and sales at $14.97 were $18,000!  Hence the name, the Goldilocks Factor where your offer is one of the three beds. One price is too high, one price is too low, and one price is just perfect.

Your job is to get your Goldilocks prospect into one of the three ‘beds’ when they’re ready to buy and see which bed is most comfortable. This is the least important of the pricing strategies, because it’s difficult to know which three prices to test (all three prices could be too high or too low). It’s a good idea to test more prices after your first Goldilocks test, but only if it doesn’t conflict with pricing strategy 5, below.

Pricing Strategy 2: Start By Flooding Your Store

This may sound counter-intuitive, but it’s not in your best interest to set the first price for a product or service which will make you the maximum amount of profit. Chances are, it could cause you serious financial harm. Here’s why.

To maximize your profits usually means setting your price reasonably high.  This results in fewer customers making you more money. That is what you want – once you’ve been in the market awhile and experienced up to 1,000 transactions.

The reason you don’t want that price right up front is you’ll drastically reduce your buyer volume, which means you’ll drastically reduce:

- the speed at which you can finish testing other elements of your sales system, like headlines, guarantees, bullet points, copy, etc.

- the speed at which you can optimize your pay per click ads for profit per impression, a powerful metric which gives more insight into what ppc ads really cost than almost any other.

- the speed at which you can get customer feedback about your product.

- the speed at which you can grow your buyer list.

- the speed at which you can develop referrals from satisfied customers.

The value of all the above is far greater than the extra profit you’d generate if you priced for optimum visitor value immediately out of the gate. Early on is when you’re bound to have product issues which need to be fixed. Often, these are issues which only buyers can point out to you.  People are more likely to be aggravated with these issues if they’ve paid $100 for an item compared to $30.

Bottom line: start  prices low for high volume and a flood of customers so you’ll have a real business with lots of buyer feedback. You won’t keep prices low (see pricing strategy 2), but long term it definitely pays to start there.

The safest thing is to perform a Goldilocks test at about, a little below, and a little above the lowest serious competitor you have. If your main competitor is priced at $59.99, you might test $49.95, $59.95, and possibly $77.  If your product fails to sell, you can be pretty sure it’s not the price.

Pricing Strategy 3: Notify and Reward Your Loyal Customers

Once you’ve been through your first 1,000 transactions and you’re confident in your product and sales system, start methodically raising the price. Keep in mind:

- Make sure to let your customer list know about the impending price increase.  This is a courtesy seldom practiced by most marketers. Those who have been considering your original offer will appreciate your transparency.  Some will be angry when you tell them but more will be angry if you don’t. You can’t please everyone.

In the end, if what you’re offering is actually beneficial and has value, and you firmly believe your customers will be better off with your product or service, then the flood of new customers, driven by the sense of urgency, will be good for everyone.

- If you’re providing a monthly service, make sure your prospects can lock in the current rate. Reaffirm to them that their rates are locked in and protected.  This way, you reward your early adopters and you actually build more loyalty, not only because they’re grateful you’ve locked in their price, but because they don’t want to leave and come back at the new, higher rate.

- In many markets, particularly those with a lengthy follow up sequence, there will be a high volume of prospects “on the fence”. You’ll find it preferable to raise the price gradually, in increments, to take maximum advantage of the “fence sweeping” phenomenon.  This gives you more time to continually improve your product, customer service, etc.

Pricing Strategy 4: If People Say Your Price Is Too High…

…It simply means you have yet to convincingly build up the value in your marketing materials and presentations.

This is where everything begins to tie together.  It’s also the most important reason not to have hard and fast prices. Price is perceived in the complete context of your overall marketing efforts.  Which means an offer from pay per click advertising will perform differently  than endorsement traffic, referral traffic, organic search, direct mail or email marketing.

The more value you build into your free content and follow ups means less marketing effort down the road. Price is also very sensitive to how you’ve built value in other aspects of your business, such as customer service and guarantees.

Pricing Strategy 5: Test Where There Is Money

For maximum conversion, the classic saying is “always be testing”. That’s true, but only to a point. If you were always testing, you could be testing and doing nothing else. There is a cost associated with testing, whether it’s time, money, effort, or morale (like when testing shows a negative result).

The realistic answer is you never know if $29.99 or $29.95 is going to be the Goldilocks price (one marketer did a test in 2007 using those 2 prices and the difference in conversion was over 65%!).  If you reach the point where you have a substantial number of front end buyers, you’ve done a few price increases, and now you see opportunities to expand your lifetime value for each customer several fold by developing your back end, then it makes no sense to test!

Seriously, a lot of marketers go overboard when it comes to testing. Don’t make the same mistake  Testing can give you the illusion you’re in control of a world which is chaotic by nature. That’s why it’s very important to know how to do it – and when not to.

I welcome your comments and experiences.

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