How Much Should You Sell A Product For? This story shows theres no one "RIGHT" price!

[Dien Rice]

Here's a story of what one guy (William Cohen) did ... Which reveals a lot about the "psychology" of pricing!

First, here's the way a lot of business people (especially new ones) look at pricing. They look at their cost to create the product or to provide the service. Then, they add on a bit of profit for themselves. And that's the price for their product!

So, for example, let's say you have a business scanning a client's computer for viruses, and removing the viruses when they are found. Let's say (to make it simple) that it takes an hour to scan a computer and remove the viruses. Also, to make it simple, the business person can use free anti-virus software, so there's no additional software cost. (Eg. like using this software.)

Well, if this person, say, values his time at $20 an hour, then he might charge from $20 to $30 for the whole service. But is that the approach he should take?

Okay, now here's what William Cohen did to show that there's no one "TRUE" price for anything! He was the director of the Small Business Institute at California State University. (This example is told in the book "Making It!" by E. Joseph Cossman and William A. Cohen (p. 152).)

He created the following classroom exercise.

He divided the students in his class into two equal groups - "buyers" and "sellers". Then, he separated them so he could tell each group confidental information.

The "sellers" were told that they are selling a computer system. However, their system was now obsolete! If they couldn't sell it within a day, they had to give it away for scrap and receive nothing!

Then, he separately told the "buyers" that their entire business was built around this particular computer system (that the "sellers" were selling). They NEEDED it to do business! However, their system had broken down. If they couldn't buy an immediate replacement within one day, they had to buy a similar system from elsewhere for $50,000 !

Then, he let the "buyers" and "sellers" back together in the same room. They were each given 20 minutes to get a "deal" to either sell or buy the computer system.

The "sellers" knew if they had no sale, they would get nothing! And the "buyers" knew if there was no sale, they would have to pay $50,000 to get a system from someone else. And remember, "buyers" didn't know the situation of the "seller", and similarly, "sellers" didn't know the situation of the "buyer".

So - what happened in the end?

You might think that the computer system would "sell" for around $25,000 - halfway between the seller's minimum and the buyer's maximum. But if you thought that - you'd be wrong!

In fact, in the many deals in class for the exact same product, between buyers and sellers with the exact same conditions - the computer system "sold" for anywhere from a few dollars, all the way up to almost the full $50,000 !

And in all cases, both the buyer and seller thought the price was "fair", whatever price they eventually agreed to - that is, until they learned about the other person's "problem"!

The point is - there are many "right" prices for a product, and it all depends on your point of view.

In this example, the "buyer" gets a good "deal" if he buys it for less than $50,000. And the "seller" gets a good "deal" if she sells it for more than $0 !

Back to the example earlier on - that's why looking at your cost, then adding on a bit of profit, is often NOT the best way to price your product or service.

Instead, you should also look at it from your customer's point of view... How much would your product or service be "worth" to them? That could be related to what "problem" it solves... And how much this is could vary from customer to customer.

Going back to the example of selling a computer-virus-removal service, how much would that be worth to the customer?

To a customer who has an old computer that they never use, which they're planning to replace soon anyway - the virus removal service might not be worth much. So they probably wouldn't be willing to pay much for it.

However, to a customer which has valuable business data and software on their computer, and who needs the computer to be up and running (and reliable) within the next few hours for their business to keep running - they could be willing to pay hundreds of dollars for the virus-removal service (if it could be done reliably and quickly).

In both cases, we're talking about the exact same service.

I just thought I'd share these interesting examples!

Hope you liked the post. Your ideas and examples I'm also interested in...

- Dien Rice

I try to always see "what the competition is charging".

What are people ACTUALLY PAYING for a "similar service or product". Would they pay more if I added something of value to the service or product? Or simply, modified the product or service so as to make it "WORTH MORE" to the end users?

Ex 1) Before the internet, I sold some reports via mailorder. One was a 50 page Report "The Mortgage Minder System"...which showed homeowners how they could cut 10 years off their mortgage by paying their mortgage twice a month (26 payments a year) instead of once a month. Another seller of a similar report had already proved that his report would sell successfully for $49. So, even though I added some extra info to MY report...I felt there was "enough profit to make it worth my while" to keep my price at $49 and I did very well with it.

Ex2) Some guy was selling ad spaces on a "Daily Special Board" for $295 a year. I modified my Board, made the spaces larger and charged $590 a year and sold out each Board whenever I installed one.

Ex3) Another guy was selling ads on TV Channel Guides placed in hotel rooms for $195 a year. I modified my version, made it larger and found the "best price" for MY product was $390/year.

Ex4) A software program for "Determining The Value of a Business" was selling for $495. It had, in my opinion, too much "Accounting Lingo" and charts and database files that took a CPA to understand. I thought if I could put together something "simple" where all the owner of a biz had to do was plug in numbers from his Profit & Loss Statement and Balance Sheet...he could find out IN MINUTES....an "approx value of his business". So, after a few "test" mailings I discovered the RIGHT PRICE...a price that would bring the most "profit" was $149.

Ex5) A guy was selling ad spaces on 20,000 paper placemats for $165 ea. I made up some sample Full Color PHOTO ads....put them on a "placemat sized paper" and LAMINATED them....and got $495each....and promised a Full Year coverage instead of just 20,000. And...I only had to make up 360 of them for a 120 seat restaurant.

Ex6) Knowing how important "Telephone/Address Books" are to the ladies in my family...I created one that had ADS and Discount Coupons of local businesses and Important Info about a Town that would be of MUCH INTEREST to a Newcomer. I found the local "Welcome Lady" was charging each sponsor $4 per Newcomer...I felt I could get $2 per sponsor as long as I kept the TOTAL contacted each month around 100 contacts. And, I found I could charge $4 per contact if the book was going to New Business Owners AND...provided I kept the TOTAL billing to $200 or less each month.

So....by researching and finding what similar products and services are successfully selling for....and by my changing the appearance or function or whatever....to INCREASE THE VALUE of my product or service....I could use the other products or services "as a STARTING POINT" for pricing my stuff.

The Major benefit to this internet thing is the competitive research can be done a lot faster now. Sometimes just googling a certain Keyword can bring up many existing products or services....within minutes.

Granted, most of the products and services I've marketed were relatively simple....however....I think the same thinking can be applied to even more complex products or services.

I learned long ago (with my Burglar Alarm biz) there are 2 ways of presenting prices;
1) Start with a High Price and remove stuff
or
2) Start with a Low Price and Add stuff.

#2 has always won.

With a product I'm presently working with, I START with 1 Hotel for $x and if they'd like a 2nd Hotel for $x+....which is very little extra....they opt for the extra Hotel. As compared to showing the price of BOTH Hotels at first and offering to deduct $x for the 2nd Hotel.

It's like the larger price "scares them" and they can't get their mind back to "rational thinking". Whereas a lower initial price tends not to "scare them OFF" and they can "logically" see the VALUE of having the 2nd Hotel for "only a little bit more".

If you've ever bought anything off the "Infomercials" where you call to place your order....you will be given a "pitch" for an additional item or items.

Psychology is truly in the "pricing" of any product or service.

Ebooks, those that can be instantly downloaded, sell for less than Physical sheets of paper MAILED.

Don Alm
http://www.donalm.com
Some of My Unique Programs

Thanks guys for this post. I've been pondering this very problem for the past week or two.

And if you need a little more Pricing Help...

Some Good Reading...

A specific process can be followed for pricing goods, services
http://www.bizjournals.com/houston/s...6/smallb4.html

Pricing and Small Retailers:
Questions to Consider
http://retailindustry.about.com/libr...e_pricing1.htm

Excellent Pricing info throughout the site...
http://www.harrisonpricing.com/index.html

Phil

Dien,

Thanks for the Story.

Unfortunately, it illustrates only one thing... and Not what you think it does.

All it shows is... people will pay more for something when they didn't Earn the money themselves.

See this in action. Watch "Deal or No Deal". People have $20k in the hand and will Risk it to make it $25k. Hey, why not? They didn't Earn that first $20k.

If those same people have $20k in the bank, after years of saving, you can rest assured they would NOT be so flippant with the money to turn it into $25k. That's why they choose the low risk savings account.

A Sales Price is a Result of Supply and Demand. The market will bear only so much. And the business owner also needs to decide at which point it is more or less profitable supplying the demand.

In the end, a thing is worth Only what someone is willing to pay fot it. And the best price is what the Business Owner decides is best for him, in terms of amount of work done for dollar return.

Bill Myers is know for wanting to deal with fewer customers for more money, than more customers for less money - even if the end money is the same, and even if their is Greater Value in having More Customes to sell to a second and third time.

Michael Ross

Ex3) Another guy was selling ads on TV Channel Guides placed in hotel rooms for $195 a year. I modified my version, made it larger and found the "best price" for MY product was $390/year.

How many ads were being sold on the TV Channel Guides?

[MMacGillivray]

There's a parallel in a bricks and mortar store - when customers are looking for gifts to purchase, quite often my hubby will show them lower-priced items, while I always assume that they will spend more than originally suggested and I show more expensive items. Quite often it works!

Margaret

In "Deal or No Deal", when a decision is being contemplated, you often hear something similar to: "Well, we came here with nothing, so I guess I can take the risk and go for it".

Good observation.

Lawrence



__________________________________________________ _____________

"All it shows is... people will pay more for something when they didn't Earn the money themselves.

See this in action. Watch "Deal or No Deal". People have $20k in the hand and will Risk it to make it $25k. Hey, why not? They didn't Earn that first $20k.

If those same people have $20k in the bank, after years of saving, you can rest assured they would NOT be so flippant with the money to turn it into $25k. That's why they choose the low risk savings account."

[Dien Rice]

Originally Posted by MichaelRoss

Unfortunately, it illustrates only one thing... and Not what you think it does.

All it shows is... people will pay more for something when they didn't Earn the money themselves.

See this in action. Watch "Deal or No Deal". People have $20k in the hand and will Risk it to make it $25k. Hey, why not? They didn't Earn that first $20k.

If those same people have $20k in the bank, after years of saving, you can rest assured they would NOT be so flippant with the money to turn it into $25k. That's why they choose the low risk savings account.

A Sales Price is a Result of Supply and Demand. The market will bear only so much. And the business owner also needs to decide at which point it is more or less profitable supplying the demand.

In the end, a thing is worth Only what someone is willing to pay fot it. And the best price is what the Business Owner decides is best for him, in terms of amount of work done for dollar return.

Hi Michael,

Thanks for sharing your thoughts...

I don't have a problem with your first general claim, that "people will pay more for something when they didn't Earn the money themselves".

However, I don't think the example I wrote about is like "Deal or No Deal" at all.

On "Deal or No Deal", as you pointed out in your post, they RISK for example $20k for a chance to make $25k. If they don't succeed, they lose it all (to my understanding), or quite a lot of it anyway (I've never seen the show).

In this example, because of the way it was structured, each person has "lost" already. The "buyer" will have to spend $50,000 on a new computer system the next day if there is no deal, and the "seller" will have to give away their computer system for scrap (i.e. get $0) if there is no deal.

So if any "deal" is made for a sale between $0 and $50,000 means a GAIN for both the buyer and seller. There is no "chance" of a loss in such a deal, relative to their starting positions, in this exercise. So it's quite different from "Deal or No Deal". On "Deal or No Deal" you RISK making a loss relative to your starting point. Here, for any deal between $0 and $50,000, both parties GAIN relative to their starting point (it's "win/win", though each party may "win" unequally depending on the deal they make).

The next part of your post was regarding "supply and demand" forces in the market.

It's not clear from what William Cohen wrote (in the book I cited) as to whether that's the case here, as it's unclear if the students "paired off" first (one seller with one buyer) and negotiated that way - or if it was a "free for all", where anyone could negotiate with anyone else. Clearly, in the first case, there would be no "supply and demand" market forces, whereas in the second case, there would be.

However, another factor was they only had 20 minutes to negotiate! So, if it was a "free for all" and they also had to find a "buyer"/"seller" to negotiate with, then their window of opportunity was very small! This limited "time window" would also reduce "supply and demand" market forces, since there would probably not be enough time for every "buyer" to negotiate with every "seller", and vice versa.

Now, a person might argue that with these restrictions it does not apply to business. However, there are business situations where negotiations may have severe time pressures to get the deal done - and those situations could mimic this classroom situation.

Finally, I'll just point out (as you would know), you can "break" supply and demand forces to a degree through market differentiation, and by differentiating your product accordingly. Hence, in many businesses, it is possibly to "get around" supply and demand forces this way - at least, until a competitor mimics you!

However, you brought up some interesting points!

- Dien

Dien,

Thanks for your additional comments.

It's not the same as Deal, inasmuch as something lost - though the people don't walk with Nothing, their Kitty gets reduced. But it IS the same inasmuch as their being No Sense Of Value attached to the money because they did not Earn it themselves. As such, they are More Willing to pay a higher price, regardless of the other factors.

Re Supply and Demand: If there is One buyer and One seller, there is Supply and Demand. Even if the seller only has one left. The Demand is based on How Much the buyer wants it - a lot, burning hot want, so-so take it or leave it want. Supply and demand is Not just about How Many sellers there are and How Many buyers there are.

Michael Ross