Principle 1: Base Prices on Benefits, Not Costs
In
Chapter 2
, we looked at benefits versus features. Remember that a
feature is descriptive (“These clothes fit well and look nice”) and a benefit
is the value someone receives from the item in question (“These clothes
make you feel healthy and attractive”). We tend to default to talking about
features, but since most purchases are emotional decisions, it’s much more
persuasive to talk about benefits.
Just as you should usually place more emphasis on the benefits of your
offering than on the features, you should think about basing the price of
your offer on the benefit—not the actual cost or the amount of time it takes
to create, manufacture, or fulfill what you are selling. In fact, the wrong
way to decide on pricing is to think about how much time it took to make it
or how much your time is “worth.” How much your time is worth is a
completely subjective matter. Bill Clinton makes as much as $200,000 for a
single one-hour speech. You might not want to pay Clinton (or any
president) $200,000 to speak at your next family pizza night, but for
whatever reason, some companies are willing to invest that much.
When you base your pricing on the benefits you provide, be prepared to
stand your ground, because some people will always complain about the
price being too high no matter what it is. Almost none of the people I met
with talked about thriving in their new businesses because they always
offered the lowest price. What works for Walmart probably won’t work for
you or me. Very few businesses will succeed on the basis of such a cutthroat
strategy; that’s why competing on value is so much better.
‡
Gary Leff, the frequent flyer guy who helps busy people book their
vacations, charges a flat rate for the service ($250 at press time). Sometimes
it takes him a fair amount of work to research and book the trip, but other
times he gets lucky and it can take as little as two minutes of research and a
ten-minute phone call. Gary knows that the people he’s booking the trip for
don’t care whether it takes ten minutes or two hours; they are paying for his
expertise in getting the flights they want.
Time cost: variable, but averages thirty minutes per booking
Benefit: first-class and business-class tickets for worldwide
vacations
Cost: $250 (key point: does not vary based on time)
Tsilli Pines, who makes contemporary Judaic stationery, created a
Haggadah (a booklet used at the Passover meal) that most frequently is sold
in bulk. Single copies are available, but far more people choose a bundle of
five or ten.
Materials cost: $3 each
Benefit: nicely designed memento for families to use when
observing Passover
Cost to buyers: $14 each (key point: not directly related to the
materials cost)
We could trace this theme throughout almost every story in the book.
Some examples are even more extreme, especially in information
publishing. Every day, people purchase $1,000+ courses that cost virtually
nothing to distribute; all the costs are in development and initial marketing.
When you think about the price of a new project, ask yourself: “How will
this idea improve my customers’ lives, and what is that improvement worth
to them?” Then set your price accordingly, while still being clear that the
offer is a great value.
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