If you are like most small business owners you are not charging enough. A sluggish economy has trained customers to shop for lower prices and ask for discounts. And many small business owners are choosing to comply to make the sale.

But there is a better way.

For example,  consider the decision made by 37 Signals to charge $9.99 for their iPad application “Draft” in an industry where the average price is $0.99. Setting their price at 10 x the industry standard was calculated to manage the demand, and provide excellent customer service to clients who appreciated the product.

Explaining his decision, Fried says: “Instead of going for the land grab, we created an small Island. …. The people who buy Draft know exactly why it is valuable to them, and they think $9.99 is a fair price.”

As Fried and his team discovered, lowering your price to make a sale impacts your bottom line in several ways.

1. There is the lost margin on the sale
2. Discount customers often expect the same level of service as full price clients.  The result, you sell more, and have to increase staff to meet service demands

The perception of low value is hard to overcome…. This is a more in your head then in your clients. Once you lower your price, it is harder to convince yourself you are worth more. Take a lesson from 37 signals,  instead of lowering your price to close every sale, raise it and deliver more value to the people who choose to do business with you!

Do you know what your product/service is worth? Are you charging the right amount? Most small business owners, me included, struggle with this question. Why? Because we often confuse the cost of producing the product with the value it brings to the customer.

Establishing a price for your goods or services has nothing to do with the production cost and everything to do with the value. A great example of this in action is software.
A few years ago I bought a copy of the Adobe Creative Suite. I opened an attractive box which contained a CD and a small manual. There was less than $10 worth of material in the box, and yet I happily have paid $1,000 for the software. Why? I paid a premium, well above production cost, because the software fulfilled a need.

A few months ago I upgraded the software, through an online download. I didn’t even get the CD or manual, but I was extremely satisfied with the benefits I purchased.

Calculate Your Value

The same is true for your product or service. Your value is based on how much you help clients save, increase, reduce or improve. If you can quantify these benefits, then you have a foundation for establishing an appropriate price for your goods or services

• Use these questions to build your value:
• How much can my product save my customer? Savings may be in time, money or effort.
• How much can my product earn for my customer? Can you help them increase their income; directly or indirectly? Does it create a foundation for future opportunities or establish valuable personal relationships?
• What intangible benefits might customers realize, and is it possible to quantify these benefits? Will your product improve their abilities, confidence, appearance or peace of mind?

Focus on the Benefits

Remember, your customers buy benefits and solutions to their problems. If you can associate a dollar value with specific benefits, you have a powerful message to include in your marketing material and a solid foundation to charge a premium price for your product!

I have seen numerous pricing studies, with the same results, prospects will often think your price seems high if they have no basis for comparison.  So how does a small business get around this without sending prospects to a competitor’s site for a price comparison?

Offer choice!  For example:   Model A includes 3 features and sells for $200.  In comparison, model B includes 7 features and is only $250.  In numerous research studies, when offered two choices, 90% of consumers will select the lower price alternative.  However, when presented three alternatives, Model A and B as described above and a super Model C, selling at $600,  more than 70% of the consumers will gravitate to the middle.  Now they have a point of comparison, and your middle range product looks much more attractive.

Want to sell more of you higher priced offer?  Add a third option which is even more expensive, and watch your sales mix shift!

What is the right price for your product or service? Most small business owners struggle with this question, because they confuse the cost of producing the product with the value it brings to the customer.

When it comes to establishing a price for your goods or services, the value of your product has absolutely nothing to do with production cost. The value is based on how much you help clients save, increase, reduce or improve. If you can quantify these benefits, then you have a foundation for establishing an appropriate price for your goods or services provided by your small business.

It is All About Value

Think about your last software purchase. You opened an attractive box which contained a CD and a small manual. There was less than $10 worth of material in the box, and yet you may have paid $300, $500 or even $1,000 for the software.

You paid a premium, well above production cost, because of the need the software fulfilled and the benefits it would provide.

Calculate Your Value

The same is true for your product or service. How much value do you deliver? Use these questions to build your value:

• How much can my product save my customer? Savings may be in time, money or effort.
• How much can my product earn for my customer? Can you help them increase their income; directly or indirectly? Does it create a foundation for future opportunities or establish valuable personal relationships?
• What intangible benefits might customers realize, and is it possible to quantify these benefits? Will your product improve their abilities, confidence, appearance or peace of mind?

Focus on the Benefits

Customers buy the benefits, the solutions to their problems. If you can associate a dollar value with specific benefits, you have a powerful message to include in your marketing material and a solid foundation to charge a premium price for your product.

Joanne Black wrote a good post, with tips on what small business owners can do in a lagging economy.  While very little of her content was new, I enjoyed the post because of her tone, and passion as she wrote.   Her posts described Eight “Killer Steps” to Attracting New Business in a Lagging Economy.  I picked three of my favorites.  If you want the rest of the list you will need to read her orignal post.

1. Broaden Your Perspective.  -  What business are you in? Redefine and reinvent yourself. Determine how you can create a leap in demand for your products and services. Build new alliances and consider alternate distribution channels.

This does not mean losing focus on your niche, but simply looking for new ways to serve existing customers

2. Be Nimble and Innovative.  -  You’ll never have all the facts. Go ahead; make quick decisions. Be fearless and make those tough choices. Create new uses for your products.

I firmly believe the worst decision you can make is not to make one. Even when you move in the wrong direction, you learn something as you retrace your steps.

7. Don’t Cut Prices. Increase Value.  There’s a lot of chatter about cutting prices in a lagging economy. Many small business owners think by cutting prices, you’re cutting your profits even further. Instead, consider how to “get in and get started.” Divide your offering into smaller chunks, get results and create traction. Or, give more value.

While most small business owners underprice their services, I did enjoy a recent post by Seth Godin about how high you can raise your prices before you start to lose customers.  He describes a situation with his insurance bill:

My car insurance bill has been steadily rising, year after year, despite the fact that I have a clean record. The logic, I’m sure, was, “well, let’s raise it a little and see who quits…”

If revenue increases enough to make up for the few who quit, you come out ahead. So, quarter after quarter, year after year, repeat the same process. Raise it a little, check to see if revenue rises in aggregate, and repeat

There is a point at which you will lose to many customers, and at that point, it is hard to get them back.

One alternative is to reward loyalty. Over the years, I have slowly raised my rates, for new clients.  However, my long term clients, pay significantly less.  They have stayed with me over the years, and allowed my to grow my business, building the skills I now sell at a higher rate.  And when I do have to make a small increase, they are still paying well below the new market rate.

Another alternative is to build value as you raise your price, charge more, but give more and you will earn the right to retain that client.

Drew McLellan has a great blog post about pricing elasticity. This is not an economics article, but a savvy marketing piece about which direction your pricing should go to keep you one step ahead in this turbulent economy.

He starts out by introducing the following points about pricing elasticity.

• The elasticity of price is a one-way street (we are never happy about going higher in price after the marketplace reduces costs.)
• The elasticity of price is fast-acting (we get used to the higher price pretty quickly.)
• The elasticity of price works best for necessities (we can cut back on stuff we don’t “need” but endure price hikes on stuff we think we do need.)

Read the rest of the article

Drew McLellan has a great blog post about pricing elasticity. This is not an economics article, but a savvy marketing piece about which direction your pricing should go to keep you one step ahead in this turbulent economy.

He starts out by introducing the following points about pricing elasticity.

• The elasticity of price is a one-way street (we are never happy about going higher in price after the marketplace reduces costs.)
• The elasticity of price is fast-acting (we get used to the higher price pretty quickly.)
• The elasticity of price works best for necessities (we can cut back on stuff we don’t “need” but endure price hikes on stuff we think we do need.)

Read the rest of the article

What is the right price for your product or service? Most small business owners struggle with this question, because they confuse the cost of producing the product with the value it brings to the customer.

When it comes to establishing a price for your goods or services, the value of your product has absolutely nothing to do with production cost. The value is based on how much you help clients save, increase, reduce or improve. If you can quantify these benefits, then you have a foundation for establishing an appropriate price for your goods or services.

Read More…

Check out post on Marketing Prof’s . I have become a fairly regular contributor.  This column is about pricing your product.