Most businesses price their products or services backwards: They decide on a price almost arbitrarily and then slap a real or proverbial price tag on their offering and move on. As long as there is some profit built into their price, they feel like they can now move forward with their marketing.
But when businesses do this, they put an obstacle in the way of success.
- They might leave money on the table
- They might not be competitive in the marketplace
- They might accidentally lose profit (because some expenses are not fixed)
- They might spend most of their marketing energy trying to justify their price rather than talking about benefits
Setting a price shouldn’t be an arbitrary judgement call. And once set, that price shouldn’t remain static. Rather, setting a price is a dynamic part of your business that you should be willing to adjust over time. (You might also want to read my blog post Prices and pricing strategies: How to price your products more effectively and How to price a product or service.
Here’s a new way for you to think about the pricing of your products or services:
Rather than just setting a price, think about it from the other direction: What is your market willing to pay? The amount they are willing to pay will fluctuate over time within a narrow band.
I’ve illustrated this very simply in the blue band below. If you think of the vertical axis as specific amounts of money and the horizontal axis as time, you’ll see how your market is willing to pay different amounts over time (but always WITHIN THIS BAND).
I’ve purposely left dollar amounts and time periods off of this graphic because the specific amounts and time periods will change, depending on what is being a sold. A buyer of airplanes will be willing to spend millions over several years while a buyer of coffee will spend a few bucks in one short transaction. The amount of money and the time periods will differ but the concepts I’m explaining below are true for retail customers or business customers, no matter what you are selling.
Let’s take a fictional example of a coffee drinker to introduce the price-band concept. They are unwilling to spend $15.00 on coffee (that would be outside of the band on the upper end) and they are unwilling to spend a quarter on coffee (that would be outside of the band on the lower end). Their reason not to spend $15.00 on a coffee might be that they don’t have $15.00 to spend. Their reason not to spend $0.25 on coffee might be that they perceive twenty-five cent coffee to be too nasty to be worth drinking.
But within the price-band, they might be willing to spend anything between those amounts — For example, $12.00 for a grande-cafe-frappa-mocha-whatever at Starbucks or a thirty-cent discounted coffee with a fill-up at their local gas station. Any price in between those points is something they are willing to spend.
In the example below, I’ve shown 3 price points (in green) at one period of time in the price-band (although I think there are probably many more price points within price-band…
Again, the price points within the price-band are those price points that the customer is willing to pay. There are price points outside of the price-band that the customer is unwilling to pay.
What a customer chooses to pay or chooses not to pay depends on a variety of factors. Some of them include:
- How much money the customer has available right now
- How much money the customer thinks they will have or need in the near future
- How desperately the customer needs the product or service
- How closely the product or service addresses their needs
- Peer pressure (to buy the product or to spend a certain amount)
Each individual buyer sets their own price-band but if you think of several individual price-bands on the same chart there would be some overlap. Some of your customers would have higher price-bands, some would have lower price-bands but in general those price bands would overlap.
Not only do prices with the price-band fluctuate, but price-bands fluctuate over time. To use the coffee example, again: A college-aged student might have a narrow price band that hovers around the lower-end of the market because they don’t have a lot of money. Later in life, when they are earning an income, their price band might grow. But then they make friends with someone who only drinks high-end coffee and they have peer pressure to pay even more. But then they lose their jobs and cut back on their coffee consumption to save money.
So what does this mean for you?
Well, there’s a lot I can say about this (and I’m going to write more about it in the coming week) but I wanted to first introduce the concept of the price-band so I could build on it in future blog posts.