How Do You Pick the Best Price for Your Product?
My business partner John and I have this long-standing debate over pricing strategy.
I'm a big believer in the “three-tier” pricing model.
This is where you offer three variations of your product at different price points. Maybe you have a $99 version, a $199 version and a $299 version.
John prefers a simpler approach:
You set your price high and make a single take-it-or-leave-it offer.
His argument on this is that you'll lose some sales due to the higher price, but since you're only offering one price point, some of the people who would have bought the lower-tier options will shell out the extra cash for the complete package.
I contend that rarely happens.
Think of it this way:
Say one day you're driving up a hill, and suddenly the transmission in your Toyota Camry blows. Wheels freeze up, you ain't going nowhere.
The mechanic says it's going to cost $3K to repair—more than the vehicle is worth.
So that weekend you schlep yourself to the car dealership to replace your vehicle.
As soon as you step out of your rental, a salesman pounces on you and asks what you're looking for.
I'm looking for a 2-year old Honda Civic in nice condition, you say.
Hmmm, well, I'm fresh out of those, the salesman says. I only have one car in stock right now—BMW 325i with all the options.
What do you say next?
Do you say, OK, I was really only planning to spend $15,000, but since that's all you have, I guess I can fork over $50K instead… ?
It's not that you don't want a car.
It's just that your desire for the car caps out around $15,000.
This is true in every market.
There are customers who would only spend $10 and not a penny more.
Others would gladly spend $100 but not $500.
Some wouldn't dream of spending *less* than $1,000.
It's all about their interest level and perceived need for whatever it is you sell.
And the way to maximize sales and profits is to match your available pricing options to the stratified interest levels of your market.
So now for the fun part:
John and I have agreed to a little “pricing showdown.”
We're going to test out a tiered pricing model with our flagship product, How to Market Yourself as a Software Developer.
Up until now we've sold the product at a single price of $299.
Over the next couple of days I'm going to reconfigure our sales page to offer 3 separate tiers.
I'll track conversion rates and overall dollars in the bank account.
Should be a fun experiment—I promise to share the results when I have more info.