Pricing is an important part of building a business.
You could have the best product in the world, but if your pricing doesn't make sense in the context of what customers are used to paying, you're going to have a hard time convincing them otherwise.
Of course, there are always unique exceptions to the rule. For example, Yeti found a way to sell coolers the market had typically priced between $50 and $100 for almost 5x that. A Yeti cooler can go for anywhere from $199 to $800 or more--with their most expensive cooler priced at $1,299. In this case, pricing is being used to communicate value to the customer. The same way an expensive car signals higher-quality materials, a faster engine, etc., an expensive cooler says to customers, "This isn't your average camping product."
In order to bring a more expensive or less expensive product to market, however, you need to be able to explain to customers why your pricing is fair, appropriate, and "worth it."
For example, my company recently made the decision to actually lower our prices. Reason being, we've spent the past few years building a brand focused around inclusivity. Our entire mission has been to provide bras and lingerie for all types of women, all types of body shapes and sizes, and to go against the status quo of the one-size-fits-all mentality.
Our best-selling bra has historically retailed for $68. That created a certain pricing structure, making it difficult to reach some segments of the market. Not everyone can afford a $68 bra. And so, because we've been able to scale our manufacturing over the years and improve efficiencies, we wanted to take another look at our price point and adjust it to a level that still reflects the quality we offer but allows more women to try and experience ThirdLove as a brand.
We wanted to lower our prices to further our mission of being more inclusive. In the process of doing so, I've learned a lot about pricing and how, as a founder, you should approach the big question.
So, as a business owner, how should you think about pricing your own products and services?
1. Pricing should generally be determined by your cost structure.
The goal is for you to make pricing decisions based on data. But many times, business owners will throw a number out there and see if it sticks. It's far better to start with a bottoms-up analysis.
How much do you plan to spend on marketing and sales, and what's your cost to convert a customer? What are your other costs? And then, what margin are you aiming for? If you haven't reached scale yet, you'll also want to consider what your cost structure will look like at different points in the future.
By starting there, you build a bottom-up pricing strategy. If you don't start by understanding your true costs, you're most likely going to end up pricing your products or services in unprofitable territory.
2. Price should reflect where you want to sit in the current ecosystem.
Going back to the Yeti example, pricing should be used as a positioning tool. How do you want to align yourself among the competition?
Very often, price indicates quality to the customer. Conventional wisdom says the more expensive the product, the "better" it is. That said, you also need to come up with a price point that is still tolerable for the market--or that can at least be understood as to how you got to that number.
For example, the reason we set our price point where we did six years ago was because we wanted to align ourselves with the higher-end department store brands. Today, our market share and sales are higher than many of those same department store brands, and there are many new direct-to-consumer entrants to the space, so it made sense to adjust our pricing to reflect the new landscape.
3. You can always reduce pricing. It's harder to increase pricing.
When in doubt, you should always err on the side of starting at a higher price point.
In general, it's easier to bring prices down over time than it is to suddenly start charging a premium. Another way to think about this is how promotional pricing will play into your larger strategy. If you believe your target customers would be more incentivized to purchase products that are on sale, it may make sense for you to start with a higher price point and bake regular discounts into your sales model.
Conversely, making your products better over time while simultaneously reducing pricing allows you to earn a different level of trust with your customers. For example, Tesla recently announced reducing pricing on their Model S, which grabbed headlines and gave Tesla die-hards even more reason to love the brand. These can be powerful moments in a company's public narrative.
All in all, pricing is not to be underestimated. The numbers you choose matter, and can dramatically impact the way your products are perceived in the market.