How to use the psychology of pricing to nail your pricing and achieve business growth.

When you’re starting a business, or running your own business, one of the most important things you will need to decide is pricing. But how do you figure out how much to charge? How do you know if you are charging enough to grow your business? And does the price even matter? The answer to all of these questions can be found by taking a look at the psychology of pricing.

The common approach to pricing

Most of the time, when people start out in business they charge for their time as opposed to charging for the product or the service that they're delivering. People often have this mentality because they've just come out of the job market and that's how they were technically charging their employer for their services. The employer was paying a set amount of money e.g. salary or wages for a set amount of the employee’s time.

The biggest problem with this is they are not able to do any growth - they're literally only earning enough money for the work that they put in to complete each job. Even if they're working 40+ hours a week, is that 40 billable hours? Or are they out there trying to market themselves, hone their skills, or create different branding materials...

Ex-employees turned business owners often don’t yet realise the difference between charging for their time and charging for a product or service fee that factors in overheads, marketing, finance etc.

Why is Pricing so difficult?

Pricing is often a difficult conversation because we’re looking at our own product or service from the wrong perspective.

The value proposition for our target audience is so much higher than what it is for ourselves and so we often undervalue the expertise we have.

For example, if I'm offering LinkedIn marketing as a service to someone, the value I hold of that service isn't as high as someone who doesn't know how to do it. For me, I don't look at it as that valuable because I can do it, it's easy for me. But then from the target audience's perspective, someone who doesn't know LinkedIn marketing, they have no idea how to do what I do for them. Their perception is “This is really valuable stuff, this service is going to help me generate leads, which will turn into more sales ($$).”

Pricing Tip: Remove yourself (your expertise) from the product or the service that you're selling, and keep it as a product or service. You’ll have a better time at being able to push the price that it's worth, and understand the value that it's offering to the customer.

The price we pay for goods and services is irrelevant

A common myth or belief that everyone has which makes us hesitant to charge more is that the cheapest price works. There are so many studies and real world examples where this is shown to be untrue. Consumers pay for perceived value, they don't necessarily want to just go for the best price. 

Retail proves this every day, with stores in all price categories doing well. You can buy a black t-shirt for $5 or you can buy it for $200. The perceived value of the $200 t-shirt is compelling enough that there is a large enough market to make it a sustainable business model for many companies. Often customers believe that the more they pay the better the quality.

Understanding pricing psychology in a way that makes you realise how people actually think about pricing, helps us overcome these mentalities, beliefs, and problems we face with pricing.

It’s the value that is important

“Price is what we pay, value is what we get.” - Warren Buffet

When someone buys a Ferrari, they’re not buying the Ferrari to get from A to B - they can get a Corolla that can do that. That's what I call the commoditized product, that's just the utility factor of what you're buying.

The actual value of owning a Ferrari is status. If you're driving down in a Ferrari, you're going to turn heads. People understand what they're worth and what they sell for, so they associate a level of success to that particular product.

Ferrari could triple their price overnight, and probably still sell a reasonable amount compared to what they currently are. If you can afford a Ferrari, what's the difference between $1m and $3m when buying status?

Pricing Tip: When you're selling, you should be thinking about the value you add into the system. Get that price as high as possible for the value that you are comfortable delivering.

Understanding the value you add

In order to understand the value you add, you have to understand the market and what are you actually selling?

It's quite often never the product or the service itself that you are selling. It's always a word like hope, trust, status, things like that - that's what you're really selling. Once you understand that, you can almost put whatever price you want on it.

Your first steps to nailing your pricing

1. Triple your prices and see what happens

 The very best thing to do if you're not sure why you're not making enough money is just triple your price. Just do it, just up your price, and see what happens.

2. Do some research, real research.

 Google will give you all the answers that you need but it takes time. Use a spreadsheet or a piece of paper, draw up a grid and make some notes. Make sure you collate the data together and get some aggregated data. If you don't know how to do that, use Google and ask how to do it. Don’t put too much emphasis into outliers, try get a view of the actual market nota few players.

3. Understand the value of your product or service.

 Understand the value you add and try to get it down to a single word like ‘hope’, or ‘trust’, or ‘status’ or ‘time’. What is that one word that you're giving the person?

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So to sum it up - triple your prices, do your research, find out that spectrum of pricing, find out what that looks like, and see where you fit in from a value proposition.

Can you think of a real world example of the psychology of pricing at play? What brand or company do you think has mastered the art of pricing?