How to Price Your Products — Framework to Simplify Getting it Right
Are you a small business owner or entrepreneur that struggles to set a price for your products or services? Are you worried that your sales suffer because of incorrect pricing? You’re not alone.
Over 35% of small business owners have problems with sales. When we consider sales and marketing together, over 50% of small businesses cite issues. An average of 56% of customers abandon purchases due to pricing. In fact, pricing is often the cause of marketing and sales problems.
The good news is, we can set our prices. That gives us the power to address these challenges. But, most of us have precious little idea of how to approach pricing. Fewer still have the ability to make pricing a competitive advantage.
Pricing can often feel like an arcane art rife with phrases such as; value pricing, pricing equilibrium, cost plus pricing, etc. When I was in business school at Duke, when discussing pricing we talked about; Bass Diffusion Models, conjoint analysis, Porter’s five forces, marketing Ps and Cs, management accounting, supply chain, and so on.
For a small business, we only need to think about two pricing approaches. Value pricing and cost-plus pricing are sufficient to meet our needs. We don’t need all the business school models because we don’t own factories, invest millions in product development, or have complicated and expensive supply chains.
Value pricing is setting a price based on what our customers are willing to pay and is tied to the perception of value. Cost-plus pricing takes our cost to deliver the product or service and adds a fixed percentage or value.
So we’ve now made it a bit more straightforward. But, the elephant-sized question remains — how do we set a price that helps maximize our profit?
If we set our prices too low, we may struggle to make a profit, and our product may appear low quality. If we set our prices too high, we risk not selling much.
No formula exists that will give us a perfect price for our products and services. But, we can use a framework to come up with an initial price and then observe sales. Once we have more information, we can adjust the price up or down to find the best price to charge. Sometimes we’ll find that we need to lower the price to sell more. Other times we can raise the price to increase the perceived value of what we’re selling.
The infographic below illustrates a pricing framework I call WRAP Pricing. Below the graphic I’ll explain in more detail what each step means. Click here for a free copy of the WRAP Pricing Framework and the infographic.
The WRAP Pricing framework will help us set an initial price. We need to test that price and change it based on how it helps sales. Now, instead of guessing what price to charge, we begin with a well-considered price.
W: W is for the 5 W’s. The 5 Ws are five questions that set the stage for setting a price. The answers also form the background of your marketing message. Answer the following questions about your product or service. Ensure that you answer from a customer’s perspective.
What problem does it solve?
Who needs to solve this problem?
What circumstances are they in when they need to solve this problem?
Why is your product or service the best solution?
Where are your customers and how do you reach them?
R: R stands for Research. Now you start digging deeper and developing a better understanding. You seek to know that value of your solution. You carefully define the market for your product. You research your competitors. Then you ensure you know how much it costs you to deliver the solution to your customers. Lastly, bring your goals into play. How does this product or service fit into your business goals?
A: A stands for Analyze. By now you have a lot of information. It is time to study it and define what you know. State your product / problem fit. Write down your product / market fit. Establish levels of value and how your offering fits in with your others goods or services.
P: P stands for Prove. Your research and analysis have led you to an understanding and initial price. Now you have to “get out of the building” and interact with your customers. Test the price, get feedback, see if your analysis is correct, and learn how you can improve the product.
Once you’ve gone through the WRAP Pricing framework, you will have set a price with confidence. You may adjust the number in the future, but you know that you set the initial price with a reliable method.