What's in a price? How to price your products and services

What's in a price? How to price your products and services

So you have something new to sell: maybe your first book or a hip new SaaS. How do you decide the price? How do you know you're not overpricing? Or underpricing? Why, oh why, did you ever think to sell something?!

Instead of choosing a number by looking inward at your costs, you can use what programmers use best: an abstraction! You'll learn a model for picking the right price for your product and what that price communicates so you can confidently price your next great invention. You'll leave with an actionable list of next steps for pricing your future projects.

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Michael Herold

April 18, 2018
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Transcript

  1. What's in a Price? How to price your products and

    services
  2. My name is Michael Herold. Please tweet me @mherold or

    say hello@michaeljherold.com.
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  4. We help creatives do their best work.

  5. We are hiring.

  6. Questions? Tweet @mherold during the talk.

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  13. We were launching a new product ...

  14. and planning to price it at $99/month.

  15. I asked, "How did we decide on that price?"

  16. Can you guess what the answer was?

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  19. What is missing from this picture?

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  21. What if you ...

  22. What if you have a side gig?

  23. What if you are a solopreneur?

  24. Pricing your first product is ...

  25. Pricing your first product is scary.

  26. Pricing your first product is hard.

  27. Pricing your first product is full of angst.

  28. It doesn't have to be.

  29. How can we make it easier?

  30. How can we go from ...

  31. How can we go from !

  32. How can we go from ! to

  33. How can we go from ! to ☺

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  37. What's in a price?

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  49. What does this graph mean for us?

  50. Supply is largely controlled by us.

  51. Demand is largely from the customer.

  52. We need to figure out demand to understand how to

    price.
  53. It's time for an abstraction.

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  57. Economics is applied in many disciplines.

  58. Economics is applied in finance.

  59. Economics is applied in accounting.

  60. Economics is applied in political science.

  61. Economics is applied in neuroscience.

  62. Economics is applied in market research.

  63. Market research uses economic principles to build models for understanding

    customers.
  64. Van Westendorp's Price Sensitivity Meter

  65. The price sensitivity meter is ...

  66. The price sensitivity meter is easy to use.

  67. The price sensitivity meter is easy to understand.

  68. The price sensitivity meter is lightweight.

  69. The price sensitivity meter is based on surveys.

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  71. Process

  72. 1. Decide on your pricing scale.

  73. Aim for 25-40 steps.

  74. Capture both impossibly high and impossibly low.

  75. Pricing a granola bar Step Maximum 1 $0.50 2 $1.00

    3 $1.50 ... ... 20 $10.00
  76. 2. Survey your audience.

  77. Start with a detailed explanation of the product or service.

  78. Start with a demonstration of the product or service.

  79. Four questions

  80. At what price do you begin to think the product

    is so inexpensive that you would question its quality?
  81. At what price do you begin to think the product

    is a great deal for the money?
  82. At what price do you begin to think the product

    is getting expensive, but you still might consider it?
  83. At what price do you begin to think the product

    is too expensive to even consider?
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  85. 1. Too cheap 2. Cheap 3. Expensive 4. Too expensive

  86. 1. Too cheap 2. Cheap 3. Expensive 4. Too expensive

  87. 1. Too cheap 2. Cheap 3. Expensive 4. Too expensive

  88. 1. Too cheap 2. Cheap 3. Expensive 4. Too expensive

  89. Ask the questions in both increasing and decreasing order.

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  91. 1. Too expensive 2. Expensive 3. Cheap 4. Too cheap

  92. 1. Too expensive 2. Expensive 3. Cheap 4. Too cheap

  93. 1. Too expensive 2. Expensive 3. Cheap 4. Too cheap

  94. 1. Too expensive 2. Expensive 3. Cheap 4. Too cheap

  95. If you get impossible answers, correct them.

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  97. Now it's time for some ...

  98. Now it's time for some statistics.

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  100. Cumulative distribution functions (CDFs)

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  102. A function where the right-hand side is equal to the

    probability that a random variable is less than or equal to x.
  103. A function where the right-hand side is equal to the

    probability that a random variable is less than or equal to x.
  104. Respondent Cheap 1 $1.22 2 $9.99 3 $4.88 ... ...

  105. cheap = [1.22, 9.99, 4.88, ...]

  106. A function where the right-hand side is equal to the

    probability that a random variable is less than or equal to x.
  107. A function where the right-hand side is equal to the

    probability that a random variable is less than or equal to x.
  108. Step Maximum 1 $0.50 2 $1.00 3 $1.50 ... ...

    20 $10.00
  109. Step x 1 $0.50 2 $1.00 3 $1.50 ... ...

    20 $10.00
  110. cheap = [1.22, 9.99, 4.88, ...] scale = (0.5..10).step(0.5) #=>

    [0.5, 1.0, 1.5 ...]
  111. A function where the right-hand side is equal to the

    probability that a random variable is less than or equal to x.
  112. A function where the right-hand side is equal to the

    probability that a random variable is less than or equal to x.
  113. cheap = [1.22, 9.99, 4.88, ...] scale = (0.5..10).step(0.5) #=>

    [0.5, 1.0, 1.5 ...] scale.map { |x| cdf(x, observations: cheap) }
  114. cheap = [1.22, 9.99, 4.88, ...] scale = (0.5..10).step(0.5) #=>

    [0.5, 1.0, 1.5 ...] def cdf(x, observations:) end scale.map { |x| cdf(x, observations: cheap) }
  115. A function where the right-hand side is equal to the

    probability that a random variable is less than or equal to x.
  116. A function where the right-hand side is equal to the

    probability that a random variable is less than or equal to x.
  117. cheap = [1.22, 9.99, 4.88, ...] scale = (0.5..10).step(0.5) #=>

    [0.5, 1.0, 1.5 ...] def cdf(x, observations:) end scale.map { |x| cdf(x, observations: cheap) }
  118. cheap = [1.22, 9.99, 4.88, ...] scale = (0.5..10).step(0.5) #=>

    [0.5, 1.0, 1.5 ...] def cdf(x, observations:) count = observations.select { |obs| obs <= x }.count end scale.map { |x| cdf(x, observations: cheap) }
  119. cheap = [1.22, 9.99, 4.88, ...] scale = (0.5..10).step(0.5) #=>

    [0.5, 1.0, 1.5 ...] def cdf(x, observations:) count = observations.select { |obs| obs <= x }.count count / observations.count.to_f end scale.map { |x| cdf(x, observations: cheap) }
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  122. Start graphing your CDFs.

  123. First, graph expensive and cheap.

  124. Look for the intersection.

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  126. Indifference price ... ...

  127. Indifference price may be the median price in the market.

  128. Indifference price may be the price of an important market

    leader.
  129. Indifference price indicates price- consciousness.

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  132. Look for psychological thresholds.

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  136. Next, graph too expensive and too cheap.

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  138. Look for the intersection.

  139. Optimal pricing point ... ...

  140. Optimal pricing point indicates minimum resistance to change.

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  143. Look for psychological thresholds.

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  147. Graph all four curves together.

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  150. Create not expensive and not cheap by inverting their counterparts.

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  153. Then combine them with too expensive and too cheap.

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  155. These intersections are your points of marginal cheapness and marginal

    expensiveness.
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  159. These two points form the range of acceptable prices.

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  163. Graph all curves together.

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  168. Make your decision!

  169. Are prices inherently adversarial?

  170. Pricing doesn't have to be about extracting maximum value out

    of your customers.
  171. Often, it works out better if you price for some

    consumer surplus.
  172. Customers can be your greatest champions.

  173. Gotchas

  174. Define your scale before you survey.

  175. When possible, segment your participants into logical groups.

  176. Further segment your participants and reverse the order of the

    questions.
  177. Make sure you are very clear with your description.

  178. Make sure you are very clear with your description.

  179. Conduct your first surveys with a mock up.

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  183. One simple model.

  184. A discipline outside our own.

  185. Liberate the best ideas.

  186. Use them for intentional design.

  187. Help your customers be awesome.

  188. Consider thinking of your customers as partners instead of customers.

  189. My name is Michael Herold. Please tweet me @mherold or

    say hello@michaeljherold.com.
  190. Image Credits 1. Business Model icon by Thomas Knopp, from

    the Noun Project. 2. Cricket by Ed Harrison, from the Noun Project. 3. Supply and Demand by Davo Sime, from the Noun Project. 4. Partnership by Vectors Market, from the Noun Project.
  191. Reference Van Westendorp, P. (1976) "NSS - Price Sensitivity Meter

    - A new approach to understanding consumer perception of price." Proceeedings of the ESOMAR Congress.