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What's in a Price?
How to price your products and services
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We help creatives do
their best work.
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We are hiring.
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Questions?
Tweet @mherold during the talk.
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We were launching a
new product ...
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and planning to price it at
$99/month.
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I asked, "How did we
decide on that price?"
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Can you guess what the
answer was?
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What is missing from this
picture?
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What if you
...
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What if you
have a side gig?
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What if you
are a solopreneur?
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Pricing your first product is
...
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Pricing your first product is
scary.
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Pricing your first product is
hard.
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Pricing your first product is
full of angst.
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It doesn't have to be.
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How can we make it easier?
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How can we go from
...
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How can we go from
!
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How can we go from
!
to
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How can we go from
!
to
☺
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What's in a price?
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What does this graph
mean for us?
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Supply is largely
controlled by us.
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Demand is largely from
the customer.
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We need to figure out
demand to understand
how to price.
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It's time for an
abstraction.
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Economics is applied in
many disciplines.
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Economics is applied in
finance.
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Economics is applied in
accounting.
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Economics is applied in
political science.
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Economics is applied in
neuroscience.
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Economics is applied in
market research.
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Market research uses
economic principles to
build models for
understanding
customers.
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Van Westendorp's
Price Sensitivity Meter
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The price sensitivity meter is
...
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The price sensitivity meter is
easy to use.
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The price sensitivity meter is
easy to understand.
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The price sensitivity meter is
lightweight.
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The price sensitivity meter is
based on surveys.
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Process
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1. Decide on your pricing scale.
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Aim for 25-40 steps.
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Capture both impossibly
high and impossibly low.
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Pricing a granola bar
Step Maximum
1 $0.50
2 $1.00
3 $1.50
... ...
20 $10.00
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2. Survey your audience.
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Start with a
detailed explanation
of the product or service.
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Start with a
demonstration
of the product or service.
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Four questions
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At what price do you begin to think the product
is so inexpensive
that you would
question its quality?
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At what price do you begin to think the product
is a great deal for the
money?
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At what price do you begin to think the product
is getting expensive, but
you still might consider
it?
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At what price do you begin to think the product
is too expensive to even
consider?
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1. Too cheap
2. Cheap
3. Expensive
4. Too expensive
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1. Too cheap
2. Cheap
3. Expensive
4. Too expensive
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1. Too cheap
2. Cheap
3. Expensive
4. Too expensive
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1. Too cheap
2. Cheap
3. Expensive
4. Too expensive
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Ask the questions in both
increasing and
decreasing order.
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1. Too expensive
2. Expensive
3. Cheap
4. Too cheap
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1. Too expensive
2. Expensive
3. Cheap
4. Too cheap
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1. Too expensive
2. Expensive
3. Cheap
4. Too cheap
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1. Too expensive
2. Expensive
3. Cheap
4. Too cheap
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If you get impossible
answers, correct them.
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Now it's time for some
...
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Now it's time for some
statistics.
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Cumulative distribution
functions (CDFs)
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A function where the
right-hand side is equal
to the probability that a
random variable is less
than or equal to x.
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A function where the
right-hand side is equal
to the probability that a
random variable is less
than or equal to x.
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Respondent Cheap
1 $1.22
2 $9.99
3 $4.88
... ...
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cheap = [1.22, 9.99, 4.88, ...]
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A function where the
right-hand side is equal
to the probability that a
random variable is less
than or equal to x.
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A function where the
right-hand side is equal
to the probability that a
random variable is less
than or equal to x.
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Step Maximum
1 $0.50
2 $1.00
3 $1.50
... ...
20 $10.00
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Step x
1 $0.50
2 $1.00
3 $1.50
... ...
20 $10.00
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cheap = [1.22, 9.99, 4.88, ...]
scale = (0.5..10).step(0.5) #=> [0.5, 1.0, 1.5 ...]
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A function where the
right-hand side is equal
to the probability that a
random variable is less
than or equal to x.
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A function where the
right-hand side is equal
to the probability that a
random variable is less
than or equal to x.
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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) }
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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) }
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A function where the
right-hand side is equal
to the probability that a
random variable is less
than or equal to x.
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A function where the
right-hand side is equal
to the probability that a
random variable is less
than or equal to x.
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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) }
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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) }
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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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Start graphing your CDFs.
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First, graph expensive
and cheap.
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Look for the intersection.
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Indifference price
...
...
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Indifference price
may be the median price
in the market.
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Indifference price
may be the price of an
important market leader.
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Indifference price
indicates price-
consciousness.
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Look for psychological
thresholds.
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Next, graph too
expensive and too cheap.
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Look for the intersection.
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Optimal pricing point
...
...
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Optimal pricing point
indicates minimum
resistance to change.
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Look for psychological
thresholds.
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Graph all four curves
together.
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Create not expensive and
not cheap by inverting
their counterparts.
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Then combine them with
too expensive and too
cheap.
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These intersections are
your points of
marginal cheapness and
marginal expensiveness.
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These two points form
the range of acceptable
prices.
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Graph all curves together.
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Make your decision!
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Are prices inherently
adversarial?
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Pricing doesn't have to
be about extracting
maximum value out of
your customers.
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Often, it works out better
if you price for some
consumer surplus.
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Customers can be your
greatest champions.
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Gotchas
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Define your scale before
you survey.
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When possible, segment
your participants into
logical groups.
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Further segment your
participants and
reverse the order of the
questions.
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Make sure you are
very clear with your
description.
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Make sure you are
very clear with your
description.
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Conduct your first
surveys with a mock up.
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One simple model.
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A discipline outside our
own.
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Liberate the best ideas.
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Use them for intentional
design.
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Help your customers be
awesome.
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Consider thinking of your
customers as partners
instead of customers.
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My name is Michael Herold.
Please tweet me @mherold or
say [email protected].
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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.
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Reference
Van Westendorp, P. (1976) "NSS - Price Sensitivity
Meter - A new approach to understanding consumer
perception of price." Proceeedings of the ESOMAR
Congress.