One of the most fundamental decisions that every business must make is “What price should I charge?” The right answer to that question is a company should charge “what the market will bear”, in other words, the highest price that customers will pay.
However few companies use this approach. Instead, prices are usually set using a histrical process such as cost mark-up, matching competitors, gut feel, or back of the envelope calculations. While easy to determine prices using these methods they don’t take into account the most important element of setting a price – an understanding of how much customers will pay. As a result, these prices bear no relation to what the market will bear leading to lost profits.
So how do you find out how much your customers will pay? Simple – ask them. Of course, you can’t ask customers directly how much they are willing to pay as they’ll likely bias their answer to a price that benefits them. However, there are a variety of ways to better understand how your customers think about your price – interviewing them is one of the most effective ways.
Here are some tips that I recommend you use to better understand how customers think about pricing:
First, position the interview as a satisfaction survey. Your goal is to understand what customers like or value about your product or service and gain insights that will better serve them in the future. Customers appreciate being asked how they can be better served and will open up.
Next, ask a series of general satisfaction questions and be sure to include the following pricing-related questions:
1. What rival products did they consider purchasing? If customers tell you they do not bother to look at other products, this is a clear signal of an opportunity to raise price. Alternatively, those who consider several alternatives are likely to be more price-sensitive.
2. What do they think about your price – too high or too low? Don’t probe too much simply ask and listen.
3. Ask what other features they would like to be added to the product or service. These insights will help you better understand what customers value and what they’re willing to pay a premium for. This can lead to innovation such as new features or added values services.
4. Ask what they like and don’t like about your pricing . This open-ended question provides interviewees an opportunity to discuss pricing.
5. Ask if they like the way they purchase your products or services or if there are other ways they would prefer to buy your product. Most companies sell products using a pricing menu — pay per transaction. But there are many other innovative pricing techniques that can be used to sell a product such as guaranteed future price, success fee, payment schedule, etc. If customers prefer a different method of setting prices, be open to meeting their needs.
Answers to these five basic questions lay the foundation for a successful pricing strategy.
