🤔 The price is right?

The single most common question we get from coaching clients when talking about launching something new is, “Does this seem like the right price for this offer?”

As a society, we’re price takers, not price setters for basically everything in our lives. And most people set prices for their offers once, maybe twice, and then incrementally increase them over time.

Most of us don’t have enough experience with setting prices to have calibrated our intuition about how to set a price. So how do you actually go about it?

On a whim in business school, I took a class on pricing, and we went deep (regression analysis on price elasticity of a customer segment sounds fun right?), the most impactful thing that stuck with me is there are 3 most common ways to think about setting prices for products/offers.

When launching an offer for the first time you have very little factual data about what your customers are willing to pay for something. With the most unknowns, it’s the most difficult time to price so let’s work through an example of the three ways of pricing when launching a new offer.

Yesterday we announced branding mini-sessions in Indianapolis on Sept 27. This is a new offer for us so we had to figure out how to price it. We’re offering 45-minute sessions, 2 backdrop options, 25-30 edited photos, and 2 week delivery time.

Cost-Based pricing

The most intuitive method for most people when it comes to pricing is starting with your own costs. The simple formula here is {Price = My Costs + My Time + % Mark up}

Taking our mini session and putting rough numbers into the formula looks like this:

It’s honestly a fairly light cost structure so if we were to just base our prices on a cost base pricing model the biggest factor here would be what our time is worth. You’ll notice that I’m putting our time as worth $50/hour, which honestly for two of us working on these mini sessions is very low if we’re expecting this to support us.

Figuring out what your time is worth can be as simple as taking how much it costs you to run your biz & live each month and dividing it by the number of things you plan on selling that month (remember to account for tithe & taxes), or it could be a lot more complicated/nuanced than we can get into in this email (if you want an email on how to value your time hit reply and let me know, we can go deep next week if you’d like).

No matter how you choose to price your offers, cost-based pricing is a good gut check to make sure that you won’t be losing money when you start selling. For example early on it was reported that Rivian (Lyndon’s dream vehicle 😍) lost tens of thousands of dollars on every truck they sold making it literally impossible to be profitable until they were able to scale up the company and re-negotiate costs. When you’re just starting out, I wouldn’t advise losing money on every sale you make unless you have a clear strategy to become profitable (or mountains of money in venture capital that you can set on fire for funzies… 🤔).

Reference or Competitor Based Pricing

Level two pricing is based on looking at what the “market value” of your offer is. A perfect example of this is we live in a fixer-upper right now 🏚️, and whether we put in $20k to fix it up or $200k to fix it up will make relatively little difference to how much we’ll be able to sell our house for in our neighborhood. Looking at how much other houses are selling for and whats desirable is a much better indicator of what we can eventually sell our house for in a few years.

This is the basic premise of reference-based pricing, find 3-5 other businesses that currently sell similar offers to what you’re thinking about launching and do a side-by-side comparison. Look at the major features that a customer will make a purchasing decision on (for our house its kitchens, bathrooms, and our new deck) and measure how your offer stacks up. Then adjust your price to be above, below, or similar to the average of your comparisons to be close to what a customer would expect to pay.

For our mini session, I went ahead and 100% made up comparisons so as to not put anyone on blast by accident (please do your own research if you’re launching minis 🙏):

The straight average of these three fictional comps is $542. If you look at our mini offer I’m confident that I can make the argument that we’re offering more than all three comps. But in my fictional example comp 2 is offering a high fashion Vogue session that comes with airbrushing and lots of photoshopping at a higher price point that we just don’t want to compete with.

So for us we chose to price on the high end of comp 1 & 3, putting us at a $500 price point.

The value of going through a reference-based pricing exercise is twofold. 1. You can give yourself a great feel for how your price and offer stack up to who your potential customers will be comparing you to. 2. You can very quickly see how you can differentiate your offers in your messaging to stand out - we don’t want to provide Vogue like Highly Airbrushed images, so we can avoid that messaging completely.

Value-Based Pricing

Value-based pricing is both the best and by far the most difficult to get right. With value-based pricing both how much it costs you to deliver, and what your competitors are charging have zero effect on what you charge. The only thing that matters is how much value you’re creating for the customer you’re selling your offer to.

For example, if Jo and I decided that we wanted to add a second bathroom to our house fastexpert says a second bathroom can increase a house value by 10-30%. For our (hopefully) $200k house that equates to $20-60k. If a contractor was to quote us a value-based price they’d look at that $20-60k value addition and price based on a percent of the value increase we’d receive based on contracting with them (not their material, time or competitors rates).

Not going to lie to you, getting a clear figure for what value you’re driving for your customers is incredibly difficult especially when you’re first launching your offers. For our mini sessions I’d attempt to estimate this based on how many more sales a customer could drive by having professional images. For example, if our mini sessions were specifically targeting coaches here’s how I’d estimate value and price our mini sessions at 20% (conservative) of their value:

At the end of the day choosing a price can also be an emotional decision & sometimes running a simple analysis won’t give you a perfect price point.

And there are more footnotes and exceptions that could be said about each of these than you could possibly imagine. So I’ll leave you with one last thing for you to think about. This morning I took a survey for a news app that I’m a beta tester for (does that make me sound cool or like a nerd??) and it was pretty clear that now that they have a working product they’re trying to figure out how to make money. This question really stood out to me, “At what monthly price would it be so low that you start to question the product’s quality?”

One of the biggest ways that people subconsciously measure the quality & value of an offer is based on the price (ahem birken bag). And how you chose to price your offers is where people will anchor themselves, and how they will show up to receive and implement your offers. No pressure 😜

If you made it this far and are now more unsure about how to price than when you started. We have coaching offers if you’d like us to help you figure out how to price that new thing you’re excited to launch.

What’s you’re favorite way to price your offers? Hit reply I’d love to hear!

Lyndon