In the world of entrepreneurship, there’s nothing more anxiety-producing than setting your prices. What if you drive someone away? What if people think you’re too expensive? What if — God forbid — someone questions you about why your prices are so high?
Traditionally, businesses use cost-plus pricing to set their prices. This approach takes all the costs associated with developing and delivering the product, and then adds the desired margin to set the price.
This makes logical sense, but it fails to factor in what drives people to purchase.
In reality, material cost isn’t what gets people to buy things. It’s the perceived value of the item they’re buying. And with the ease of obtaining customer data through the internet today, more companies are setting their prices the right way by using customer-driven pricing.
Why Customer-Driven Pricing Works
Customer-driven pricing works because it puts the emphasis on the customer, not the product. You set your price according to their expectations.
This model also works because it reflects actual market conditions. It takes into consideration not only what the individual customer will pay but other market factors like competitor products.
Know Your Customer Well
The key to success with customer-driven pricing is to understand your customer well. In order to do this, create a detailed customer profile that includes not only demographic information, but also attitudes, values, and behavior. Target market research is a great way to accomplish this.
A key part of this profile is the problem the customer faces. Your product needs to solve or help with this problem. This is what determines its perceived value.
The key to selling is to show the customer how your product solves their problems and improves their life.
Other Ways to Add Value
In addition to how your product solves problems, there could be other types of the unique value it offers.
For example, it might offer flexibility in pricing. While your competitors offer only one version, you offer a variety of versions at different price points so the customer can purchase the right one for them. You might offer comprehensive technical support after purchase which your competitors don’t offer. This isn’t a feature of your product itself, but it still helps customers better solve their problems.
The Challenges of Customer-Driven Pricing
To create your customer profile, you’ll need to communicate with your audience and get their feedback so you can use this data to help you determine the right price.
One challenge here is that people aren’t always honest about the price they’re willing to pay. You have to combine data from customers themselves with objective data on sales to see what products are selling at what price points.
The other challenge is that if you base pricing solely on your customers, you could be pricing too low and leaving money on the table. Naturally, people would rather pay less than pay more for products. You can charge more for your products by ramping up your marketing and positioning your product for its uniqueness.
Offering True Value
The point of customer-driven pricing isn’t customer satisfaction, but to offer the best value possible for you and your customer. Base your pricing on the customer as a way to start a conversation with them and monitor as you start selling the product so you can make changes as needed.
Do you want to learn more about what motivates your customer to buy? Check out my Market Research Mastery System, which teaches you the A to Z of target market research and how to use it to price your products.