Deciding the price point for your product (or service) can be very difficult. (Note: Wherever I say “product” you can easily switch in the word “service”.) There are ways of going about it, namely looking at the competition, testing the marketplace with different prices, surveying the potential client base, etc. It’s still hard to do, and a bit nerve-wracking, particularly for entrepreneurs just starting out.
But once you’ve decided on a price (and you’ve done so with at least some research and not just using a dartboard), I would recommend sticking with it. Not necessarily forever (let’s hope you can raise prices in the future!), but you should stick with it and be very careful about lowering your prices.
Lowering your prices can devalue what you offer. Retail stores do it all the time, and in fact, most consumers don’t buy anything at full price anymore. We all wait for sales. It’s so prevalent now that things go on sale before they’re ever really sold at full price. Retail is an extremely tough business, and even though sales are extremely common, I still think they have the impact of devaluing the product. “Last season’s goods at 75% off!” Great, that’s a huge discount, but it is last season’s goods…I may still buy it, but I might not because it’s now in the bargain basement bin and the new stuff looks ever-so-fine.
But enough about retail. My experience is in software development (B2B) and my new business, IGotNewsForYou.com (B2C; but not retail).
Let’s talk about the software business first. Over the years we’ve raised our prices a few times. Each time I was hesitant, fearing we were getting “too expensive”. The truth is, we weren’t. Our prices are still competitive (which is important) and our sales continue to grow even as our prices go up. There’s always the question of whether our sales would go up more if our price was lower. And while it’s tempting to think they would, I don’t think that’s necessarily the case. People don’t buy solely on price (and if they do, they usually get stung by it). Having a certain pricing threshold puts us in a particular market/playing field, it sets a certain understanding for the quality of the product and its scale. It puts a marker out there for who our competitors are, and to a degree, what you can expect from the product and the company. Lowering the price devalues the quality of the product, it can change the expectations people will have about it.
Even before our software product hit the market, we were in the web services business (developing dynamic websites, e-commerce sites, etc.) and we used to receive a lot of RFPs. When it comes to an RFP most companies never take the lowest bid, they scrap it immediately. They rarely take the highest bid either, and so they look at the meaty center for their vendor. Lowering your price to be the cheapest in the hopes that it will get you the gig may work some of the time, but it’s no way to grow a business.
There’s no question in the software world that there are some inexpensive software applications that are excellent. Inexpensive doesn’t always equal cheap. And the reverse is also true, there are many expensive software applications that are absolute garbage. Inexpensive versus expensive – that’s relative anyway. The key here is that once you’ve got a price point, lowering it (whether your product is going from $19.95 to $9.95 or $190,000 to $90,000) can devalue the product in the eyes of buyers. Whether you start at $19.95 or $190,000, dropping the price may have the effect of making the product look “cheap”.
A few times in the past, we’ve tried “money back guarantees”. While this isn’t quite the same as lowering your price (and guarantees is a whole other issue) it can have a similar effect. In a sense you are lowering the price, because you’re giving people something for less than it’s worth. You’ve devalued your offer by giving people an out, and this can have the effect of people not investing as much into your product as they otherwise would have. Maybe they don’t learn it well enough. Maybe they don’t sell it up the chain of command. Maybe they just don’t care enough about it because they have that escape route (or because it was “so cheap anyway, even if it doesn’t succeed it wasn’t a huge investment”). That’s a deathtrap. When someone buys your product you want them to be dedicated to it, you want them to implement it and use it properly. Lowering the price (or giving a “money back guarantee”) can diminish people’s willingness to invest themselves into the product.
In my latest venture, IGotNewsForYou.com, pricing issues are similar but the market is certainly different. Business-to-consumer expects more pricing discounts, sales, etc. Still, if you lower prices (particularly if you rush to do it quickly before really assessing whether price is a problem) you’re not helping yourself. For example, sending an IGotNewsForYou greeting costs $3.95. Say I were to drop that to $2.95 or even $1.95 — the next thing people might say is, “Well it’s practically free, just make it free already.” Uh oh. That’s a slippery slope for any entrepreneur, and there’s no question it’s tempting to lower prices in the hope of increasing volume.
It reminds me of a cartoon I saw years ago (although now I can’t remember the cartoon) where the vendor is selling his wares so cheap it’s below cost. The genius of it (according to the vendor) is that he’s making his losses up with volume!
The price is the price. If someone feels it’s too expensive, that’s ok, they weren’t in your target market. If Porsche dropped their prices by 75% they might sell more Porsches (and they’d go out of business too), but the people that have bought Porsches in the past (i.e. the target market) would go elsewhere, because the Porsche no longer represents what it did in the past. It’s no longer an elite sports car…it’s been devalued.
When first starting out, an entrepreneur is often nervous about a lot of things, and price is definitely one of them. Will people buy what I’m selling at the price point I’ve set? That’s really the big question. If the answer is no, I would examine a host of possible reasons before I got to price (assuming again, you did some research into pricing your product competitively). As soon as you start mucking with price you’re changing the message and brand of your product, and run the risk of devaluing what you offer.[tags]lowering prices, entrepreneurship, small business[/tags]