Today’s post is the first in a two part series by guest blogger Erik Grueter. Watch for part two which will be posted next week.
Pricing is the most important aspect of your business. Period. Don’t believe me? Well, we went through a pretty thorough analysis of this in a previous pricing strategy post, but to summarize: a 1% improvement in your pricing strategy equates to an average increase in profits of 11.1%. It’s that important.
Beyond the numbers though, think about it this way: every economic transaction is a trade between two parties with price being the exchange rate for the value each of the individuals is receiving. If I run a moving company and charge someone $50 for an hour of work, then the “exchange rate” is $50 for one hour of moving. As such, that price justifies that my hour of work is worth that much. Similarly, your prices and pricing pages must boost and justify the value you’re providing for the amount of money you’re charging.
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What’s interesting though is that you can’t validate your value, only the customer can, because they’re the one putting down money to purchase what you’re selling. As such, you must utilize customer value to establish value based pricing. This is what distinguishes companies that price their products correctly, and those that lose revenue by pricing incorrectly.
In order to put you on the right track to pricing correctly through value based pricing, let’s explore more about setting up your revenue model, as well as finding a customer’s willingness to pay or in other words, the value they place in your product.
You must charge customers along your value metric
A value metric is the value your customer receives out of your product or service. If you’re selling eggs, then your value metric is one egg. If you’re selling productivity software, then your value metric is time saved. With that in mind, not only must your price and your customers’ willingness to pay for the value you’re providing be equal, but you also need to charge your customers in the appropriate manner. You wouldn’t charge someone for a months worth of coffee if they only wanted one cup.
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Likewise, remember that your customer is trying to exchange his money for the unit of value he wants. It is your job as an entrepreneur to determine what exactly he finds valuable and what his perceived exchange rate is for that value. Furthermore, you should think of this willingness to pay as a sliding scale, the more of that fundamental value you provide, the higher your price goes and the value metric you’re pricing on should be easy to understand.
For example, look at Rejoiner.com’s pricing page (below). They capture abandoned carts for e-commerce sites through email remarketing. The value they’re providing is the number of carts captured, but that’s difficult to understand and track. As such, they’re charging based on the amount of traffic they’re customer receives, as they can reasonably assume that the more traffic a site receives, the more abandoned carts they’ll be able to capture. As the traffic goes up, the price goes up, because Rejoiner is providing more value.