Don't Be Afraid of High Prices. Be Afraid of Only Having One.
Pricing Pointers, Issue #57
To maximize both profit and reach, you must move beyond the search for a single “best” price and instead implement a strategic range of prices that allows different customers to pay according to the value they receive.
Too many business owners treat pricing like a math problem with one right answer. They agonize over a single number, trying to find a “sweet spot” that won’t scare away customers but will still keep the lights on. Price setting feels like a case of “pick your poison.” You either select a high price and lose volume, or you pick a low price and kill your profit margins.
I want you to understand that this pricing dilemma isn’t a dilemma at all. It’s a false choice. Until you realize this, your ability to reap the value you’re creating in the marketplace will be severely hampered. You’ll be like the farmer who grows a great crop and leaves half of it in the field at harvest time.
Recognize the Hidden Costs of Uniform Pricing
The value of any product or service is subjective and contextual. It depends on who you ask, and when and where you ask them. This means that no single price can reflect what every buyer is actually willing to pay because different buyers have different perceived needs and budgets. Settling on a single price means inevitably under-pricing your offer for some buyers while over-pricing it for others.
Some buyers may be willing to pay significantly more than your asking price but do not have to because your offer is capped at a single point. This uncaptured revenue is profit that is effectively “escaping” from your bottom line and staying in the buyer’s pocket.
Other buyers may be willing to pay more than your unit cost but less than your asking price. For example, suppose you buy sprockets for $25 and resell them for $50. Any buyer who’d pay more than $25, but less than $50, represents more money lost on your bottom line. Suppose for example, a particular buyer would pay $40. Making that sale would add $15 directly to your bottom line.
Granted, my example is simple. But the principle is powerful: To stop these profits from escaping, you need a way to meet these different buyers where they are.
Use High Prices to Anchor and Capture Value
High prices are not something to fear; they are a tool to sell more to both high-end and mid-range buyers.
Some buyers believe that “you get what you pay for” and are willing to pay more to ensure they get the best possible results or experience. They are motivated to purchase more by what they get than by what they must pay. To them, a high price is a signal of the quality and expertise they require. They may view buying the cheapest option as a risky gamble, especially in a high-stakes situation. For these buyers, the cost of failure is far higher than the price of the premium option. It’s better to spend more and reduce the risk of a mediocre outcome. To put it bluntly, when you’re laying on the operating table, you don’t want the cheapest brain surgeon in the city.
Because high prices send such a strong signal, you can use them as a tool to frame how every other price is perceived. Adding a high-priced option shifts the buyer’s internal reference point so that the mid-price offer appears like a bargain in comparison. Next to a $2,500 handbag, a $500 option is no longer “expensive,” it’s a “sensible” deal. This anchoring effect means the top tier’s primary mission is often to stimulate sales of your mid-price offer rather than sell in high volumes itself. Even if the anchor is rarely purchased, it helps shift the customer’s focus from a price-comparison against cheaper rivals to a value-comparison between your own tiers.
Construct a Tiered Price Menu to Increase Revenue and Reach
The solution to the single price dilemma is to move from a fixed offering to a range of options at different price points. This approach replaces the restrictive question “Should I charge more or less?” with “How can I charge both more and less?”.
A tiered price menu lets you charge different prices to different segments of buyers. By offering a range of prices, you can simultaneously capture the “quality-foremost” buyers who want the best and the “price-foremost” buyers who just need a functional solution. This strategy increases your sales and profits because you are no longer leaving the high-end and the low-end of the market untouched. In short, you are increasing your profits from the top while simultaneously expanding your volume at the bottom.
Furthermore, a tiered approach establishes a “value ladder,” allowing you to land new customers at a low price point and then grow your sales with them over time. The buyer who picks the budget option now may upgrade to a higher-value, higher-priced option in the future. (Caveat, this depends on the product or service of course. Hopefully, you never need more than one brain operation. “This time, Doc, I think I’ll go with the anesthesia.”)
At this point, you may be asking, “What’s to keep every buyer from selecting the lowest-priced option on my tiered price menu?” The answer is you ensure they have to give up something they want, or accept something they don’t want, to get a lower price. Think about the airline industry. Paying a lower fare often means sitting in a less comfortable seat and/or a layover on your flight. For many travelers, the price savings isn’t worth the comfort and travel time they sacrifice.
Your New Pricing Mindset
Once you accept that different buyers can be motivated to pay different prices, the single-price dilemma disappears. So stop asking “What is the best price?” and start asking “What is the best range of prices?” Create a tiered price menu to capture more value from those at the top while increasing your sales and profits from the bottom. Don’t leave your hard-earned profits in the field.