Stop Asking "What's the Right Price?" Do This Instead
Pricing Pointers, Issue #34
As a business owner or manager, you’ve likely spent considerable time searching for the single “right” price for your product or service. This quest for the perfect price is a common struggle, but this single-price approach is inherently flawed. The value of any product is subjective; it depends on who you ask and the context in which you ask them. Because of this, a uniform price will always be simultaneously too high for some potential buyers, costing you sales and profits, and too low for others, costing you more profits.
To maximize sales and profits, you should move beyond a one-price strategy and instead offer customers a range of prices.
Recognize the Hidden Costs of One-Price-Fits-All
A uniform pricing strategy creates a constant dilemma. If you raise your price to capture more value from customers who are willing to pay more, you inevitably lose sales from price-sensitive customers. Conversely, if you lower your price to attract those buyers, you leave even more money on the table from customers who would have paid your original, higher price.
To make this concrete, imagine your company buys a product for $50 a unit and re-sells it for a uniform price of $99. You lose potential profits in two distinct ways. First, your price is too low for buyers who would willingly pay more—say, $109—but don’t have to. You make the sale, but you leave profit on the table.
Second, your price is too high for buyers who would happily pay more than your $50 cost but less than your $99 asking price. You miss out on a profitable sale entirely. The truth is a single price always under-prices for some and over-prices for others.
Empower Buyers to Choose Their Own Price
The superior alternative is a strategy of indirect differential pricing. This approach solves two of the biggest obstacles in pricing strategy: sorting (identifying who is willing to pay more) and fencing (preventing high-value customers from getting your lower-price deal). Instead of trying to determine who should pay what, you create the conditions for buyers to sort themselves by how much price really matters to them. You present a menu of options, and each buyer selects the price they want to pay from a set of choices offered to all.
I know what you’re thinking: “Why would any buyer choose anything but the lowest price?” The answer is that to get the lowest price, a buyer must accept a trade-off. They have to do something or give something up. This could be accepting a lower level of quality, purchasing a larger quantity, choosing a less desirable time, or similar concessions. This trade-off is the “fence” that keeps benefit-sensitive customers from taking the cheaper deal.
Design a Ladder of Value for Your Customers
To practically structure these price-value choices, think in terms of creating upgrade ladders. This means designing tiered offers, often in a “Good, Better, Best” format that guides customers along a clear path of increasing value. This three-tiered structure is particularly powerful because of a powerful psychological effect known as extremeness aversion. This effect makes the middle (”Better”) option appear to be the safest and most reasonable choice for many buyers
Each step up the ladder must be a true upgrade. A simple way to ensure this is to follow the “everything and more” rule: the “Better” tier must include everything the “Good” tier has, plus something more. These upgrades can take several forms, such as offering better quality, a larger quantity, or adding complementary products that enhance the core product.
To verify you’ve created a genuine upgrade, use the equal price test: If both offers were available at the same price, would nearly all buyers prefer the “Better” version? If the answer is yes, you’ve created a true upgrade.
Shift Your Pricing Mindset
The key to unlocking greater profitability and market reach is to stop searching for a single answer to a flawed question. The mental shift is simple: stop asking, “What single price should I charge?” and start designing a menu of options that captures value at both higher and lower price points.
By creating a ladder of price-value options, you empower customers to choose the offer that best fits their unique needs and budget, allowing you to harvest more of the value you are creating.