So, you have developed your product or service package, or are in the process of developing it, and now you’d like to know what price tag to put on it.
If you’re thinking about contacting you potential clients to ask them “How much would you pay for this?” for price setting purposes, you should read this post, because unfortunately you’re about to make a big mistake.
But what’s so wrong about that question? (“How much would you pay for this?”)
Well, the problem is that people, when asked out of the blue, will not know. Unless, of course, we’re talking about copycat/me too products that really aren’t differentiated, and for which a clear price reference does exist (and in that case, do you really need to ask?).
But in situations in which we are trying to price a somehow differentiated product, asking “how much would you pay?” is a terrible idea, because it doesn’t give you any information that we can use to set prices or build a pricing strategy.
There are two important things that we must take into consideration when trying to price a product.
- The first one, is that we think about price in relative terms. We always need a point of reference against which we compare the price/value relationship. In case of a differentiated product, the difference in value vs. our reference and even the reference itself is usually up for debate.
- And the second thing that we should keep in mind, is that the purpose of good pricing isn’t just to identify people’s willingness to pay and put that on a price tag. The purpose of good pricing is to develop a strategy that allows us to increase that willingness to pay.
So while the question “how much would you pay for something” does seem to help us addressing the first part, the identification of the willingness to pay, it does nothing to help us building a strategy that will later increase people’s willingness to pay for our product our service.
We want to be able to identify the thought process that leads to people’s stated willingness to pay, because without understanding that thought prices, we won’t be able to influence it.
And that question ("how much would you pay?") isn’t even that helpful when trying to figure out how to price a product. You won't find out your optimal price by asking that.
So, let’s see which 5 questions we should be asking to identify willingness to pay and develop a pricing strategy.
Question 1: “How are you solving the problem that this product addresses right now?”
What we want to get from this question is to identify potential substitute products and pain points that the customer may be having and that we can use to not only as a reference for setting our price, but also for developing our value messaging and value story once we’re trying to sell the product.
Additionally, we’re trying to identify potential sources of value which we’ll use during the value discussion that we’re having with the potential client.
Question 2: “What would you consider to be the main positive and negative aspects of this product?”
From the positive aspects, we’re looking to identify potential selling points and arguments to justify a potentially higher price.
And from the negative aspects, we want to identify product shortcomings that we may want to address before the product is fully developed, and objections to purchase that we can proactively address in our value communication story.
And now that we know how our potential customer is solving the problem that our product address right now, have uncovered potential pain points, and know what he perceives to be out product’s positive and negative aspects, it’s time to ask a very important question:
Question 3: “If price wasn’t an issue, would you buy this product?”
And this is a fundamental question. Because often when we ask people if they would buy a product, the answer is that “it’s too expensive”, “I don’t have the money”, and price becomes an excuse that people use for not thinking about why they do not want the product.
Also, people sometimes want to be polite and/or spare your feelings, and they don’t want to tell you that they wouldn’t want your product if you gave it to them for free.
So, the point of this question is to identify any barriers to purchase that aren’t price related. By asking “If price wasn’t an issue, would you buy?”, we get that easy way out, out of the way.
And if people don’t immediately say “yes”, that they’re interested in your product, they probably will never buy it. And if you haven’t figured out by now why, you may want to go back to question number two and dig a little bit deeper into the negative aspects.
If it turns out your interviewee isn't your target customer, then moving forward with the discussion about price is probably pointless... s/he isn't representative of the people who will be buying from you and whose opinion about your price matters.
Anyway, hopefully your potential client said “Yes”, and it’s time to move on to the next question:
Question 4: it’s time to finally talk about numbers.
And this isn’t actually a question, it’s a set of five questions, but I’m counting it as one because we are just repeating almost the same question five times.
So, what we’re going to ask is:
And we would follow up each of these questions with “Why?”
And the why is super important here, because we want to understand potential customers' thought process and what they’re using as a reference when they give us those numbers.
You’ll probably be surprised at how often interviewees come up with aspects that are valuable to them that you had never thought about. And that is the sort of information that is very valuable when you’re not only determining price, but also trying to build your product’s value messaging and to increase people’s perceived value of your product.
Anyway, apart from identifying the rationale that’s behind the numbers they’re giving us, potentially identifying any price anchors that may exist, and gathering more value messages that we are also always on the lookout for, this question gives us information about a couple of very important things.
And the first thing that we should be on the lookout for is any psychological pricing thresholds.
What do I mean by this? Let’s say that you find that several people state that above $100 your product becomes very expensive. This means that the effort to sell your product above or at $100 is disproportionally higher than selling it at a price a little below that value.
So, we are looking for thresholds above and below which the attitude towards your potential product’s price changes.
And this is why it’s so important to ask about prices this way, instead of asking “how much would you pay?” for something. Because when you ask how much you’d pay for something, you don’t know what people mean by that. Are they giving you their acceptable price? The great deal? The expensive? There’s just too much information missing.
Apart from that, this question is also a lot easier to answer for your interviewees.
With this questioning method you get a lot more information, and the thinking and the strategy is up for you to develop later.
For example: if you see that there’s a price level that’s generally considered to be a great deal, it might be a good candidate for starting a penetration pricing strategy if you’re considering using one.
If you then look at the acceptable price, that would be a price at which the sale isn’t particularly difficult, and people are still glad that they’re still getting a good deal. It’s a fair price, and they’re generally happy with their purchase.
If you go to the expensive level, then you’re probably still going to be able to sell your product at that price, but doing that will require a bigger effort in terms of value selling.
And finally, if you are considering pricing your product at a price level that’s generally considered prohibitive by the people are targeting, you may have a very hard time when trying to make a sale.
Anyway, there’s still a very important question left for us to go over, and that’s the firth question. It’s now time to test the price points at which you were hoping to sell you product.
So, you before start interviewing people, you should come up with four, five, six potential price points at which you think your product should be priced based on desk market research that you conduct on your own. And, for each price point, ask:
Question 5: “What are the chances that you buy this product at this price?”
And just to make the respondents’ life easier, you can ask them to tell you if their purchase likelihood is more towards 0%, 25%, 50%, 75%, or 100%.
And if they give chances of buying of 50% or lower, they’re not buying it. Even if they give you chances of 75% or 100%, it still isn’t that likely that they will effectively purchase in real life.
This question isn’t good to asses purchase likelihood. That’s not why we are asking that. The only way to assess the likelihood that people will effectively purchase later is to try to presell.
But what are we trying to get from this question?
So… there are two main purposes for asking this.
- The first one is to understand what percentage they’re giving you for each of your price points. Because even though this question isn’t good for estimating purchase likelihood in absolute terms, it does give you the relative probability for one price vs. another.
- And second, this question allows us to test people’s reaction to prices that are higher than the ones that they spontaneously gave us in the previous question.
Now that we have all the information regarding what the interviewees’ pain points are with their current solutions, what they see as positive and negative aspects of your product, and what their acceptable and expensive prices are, it’s time to challenge their answers and try to see if we can change their value perception upwards.
So, it’s time to test higher prices, and see whether we can anchor people to higher priced options. Meaning, whether we can get them to accept that they should be comparing your product’s value to a higher priced alternative. Or, if by any reason that’s not possible, whether they would accept a higher premium vs. the alternative that they are considering.
And, if we do get people to accept that our product’s acceptable price should be higher, we want to capture that rationale, because that will go straight into our value communication strategy.
Anyway, obviously there’s a lot more that could be said regarding questions to be asked, ways to analyze the data, how to develop the strategy… that I obviously cannot cover in a blog post.
Even setting the setting the stage for conducting the interview can sometimes be a bit tricky, because people want to be polite and spare your feelings, and sometimes they tend to… embellish.
So do make sure that before you start, you explain to people that they’re not doing you any favors by sparing your feelings and that helping you means telling you the truth.
But as said, I really cannot go over everything in a blog post. So, I hope you found this useful, and I hope to see you in the next post, which will be about how adding more features and more value to your product could actually hurt its achievable price. Even if all those features are awesome. So, see you in the next one! Bye!