How to Optimise Pricing to Maximise Revenue

A Controversial Principle to Follow

Most companies set a price based on all the wrong things.

They try to work out how much product development will cost, from the headcount to the tech requirements to on-going customer support. They then have an educated guess at how much revenue they will generate before calculating what they would need to charge for the product in order to make a profit.

In reality, they have no idea how much revenue they are going to generate! Nor whether the price point they set is something the customer is even willing to pay for!

In this article, I will outline 3 simple principles to follow when thinking about pricing, before - in the next article - exploring how to optimise pricing in order to maximise revenue through two specific techniques: segmentation of products & of features.

3 Core Principles of Pricing

PRINCIPLE #1:

Pricing is not about cost. Pricing is about value.

A customer does not pay for a product based on how much it cost the company to develop the product. The customer doesn’t care about this. They don’t care about the company, nor how much hard work you put into developing the product.

They simply care about what specific value they are going to get from the product. What will the product help them achieve? And how important is that outcome to the customer?

For example, the Blackberry failed because it was too expensive for the limited value it provided to customers once the iPhone launched & provided a whole new set of valuable features beyond messaging & personal organisation.

PRINCIPLE #2:

Value is the not the same as perceived value.

There is no objective way of measuring value for a customer. Value can only be measured from the perspective of the customer (i.e. how much value they perceive or believe the product will provide for them.) This means that how we communicate the value is more important than the concrete set of features your product consists of.

For example, jeans bought from a second-hand shop v. jeans bought from Levi’s seem to have the same objective value. They fulfil their job of covering you & keeping you warm.

However, the Levi’s jeans may be perceived to be more valuable by the person buying it because of the sense of increased status, quality & sense of personal identity that they attach to the Levi’s pair of jeans.

PRINCIPLE #3:

The more you charge, the higher the perceived value.

As a general rule, charge a lot of money for your products. This is because a higher price point sends a signal about value. A more expensive product will be perceived to be more valuable than a cheaper product.

That means, regardless of what the product does or what your competitors charge, the target customer will be more willing than you think to pay for an expensive product.

A $10 Udemy course on business may objectively provide similar value to a $5,000 online course, but how do you perceive the expensive online course v. the Udemy course? Likely, very differently.

(Note: This is no excuse to create a mediocre product. Ultimately, long-term success will rely on consistently delivering a huge amount of value. Sure, you might get away with converting a few customers at a high price point, but you ultimately need to demonstrate that the high price point is worth it.)

Conclusion

Pricing is not about cost. Pricing is about value.

Specifically, that means perceived value i.e. how much value the customer believes they will get from your product.

Charge a lot of money & you increase the perceived value.

Simple as that.

In the next article, we’ll delve into how to adapt your pricing for the New Economy in order to maximise revenue. For some, that might mean the difference in helping your company survive. For others, it could mean helping your company thrive.