Underpricing Is as Bad as Overpricing

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You want customers to think they're getting a good deal, but there's no point in selling yourself short. If you underprice yourself,customers might think you're worth less, and you could lose profits for no reason. One way to determine the best price point:conduct a direct-mail campaign that tests different offers.

When Approach Software, in Redwood City, Calif., launched its first product, it wanted to offer a low introductoryprice to persuade users to try its database software program. Jaleh Bisharat, Approach's marketing director, interviewedprospects and got confirmation that the $149 she was considering was reasonable. Then, to be sure, she sent out 50,000direct-mail offers with price points of $99, $129, and $149. The mailing provided the "statistical proof" Bisharat needed whensales came in almost as high at $149 as at $129. The company then tested a $199 price, but that "crossed a threshold of whatpeople would spend to try a new product through the mail," says CEO Kevin Harvey.

The low initial price did its job. One month after the product began shipping, Approach 1.0 landed on industry best-seller lists.Three months later, the company raised the suggested retail price to $399 ($279 street price) ? and the product has remained a topseller.

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