How to develop your pricing (Part 1)
April 14, 2021
In this episode, we talk about three different pricing strategies that will help you figure out how much you should charge for your product or service.
How do you figure out how much you should charge for your product or service? So today we are going to talk about different pricing strategies and how you should be thinking about pricing. There are three different pricing strategies. There is competition-based pricing, there is cost-plus pricing, and then there is value-based pricing.
So we're gonna talk a little bit about each of these. Competition-based pricing, this is probably the pricing strategy that most young founders use. And me personally, I think this is a horrible strategy because if you are looking at the competition, then you don't have a sustainable business, you're just chasing other people and you're looking at how other people are doing their business models and you're just essentially trying to copy. So Snapchat something, you'll be the Instagram, taking the stories away, right? You're not really innovating there, you're just kind of chasing wherever the market is. And this is competition-based pricing. You're just looking at how other people are doing this is essentially monkey see, monkey do you are anchoring your price based on the competitive landscape.
The reason why I don't like this is because what does that say about your company? It really doesn't say much. You can actually differentiate on price, imagine that, you know, this product And we'll just make an imaginary product, but product X cost $50 a month And there's also a product Y & Z, and they're all around the same price around $50 a month and you want to compete in that area. And if you come up with a similar price $50 a month, what is that saying to the market? Just saying, t just says that you are just like everyone else, there's really nothing different about you.
However, if you price your product or service really high, let's say you have, you know, product and I ran out of letters, I shouldn't have started with the last letters. But let's say you have a Product V. I'm going to go backwards now. So product V is your product. If you price your product at $400 a month, then people will at least take note of that and they'll say, why is this price so differently if all these other people are $50 a month, maybe there's something special about product V that makes it $400 a month. And you might get the interests of this other demographic that will be actually interested in your product just because you priced it at this higher price. So to me, I don't like competition-based pricing because you're just doing Monkey See monkey do. I like to base my pricing on and I'll go into this at the end of the episode. Let me explain what the two other pricing strategies are.
The 2nd one is the cost-plus pricing strategy. This is typically used for people who are selling physical products and they will look at all the cost it takes for them to make the product and get it into your hands. And they will just add some kind of margin on there. And typically people are using this kind of strategy because there is a lot of competition in the space and where they are trying to innovate is through their production process or delivery or fulfillment process, somewhere like that and they might try to compete on price that way with a physical product.
However, if you don't have any competition in this space and there's nothing unlike your product, then it's really difficult for someone to value what your product, how much your product might be. And when you have a situation like this, you actually can take advantage of value-based pricing.
So, value-based pricing doesn't look at your production cost, doesn't look at the competition, doesn't care about any of those things. What it looks at is who is the customer and what kind of value are they getting out of your service? And this is the key. The key is if you want to be able to price your product for you to be able to build, the type of company you want to build, then you have to know with who your customers are that will be willing to pay around that kind of price. So let's say you're, you're building something that's a little bit more pricey and this is where you're going to differentiate, well, you have to figure out who is actually going to get so much value out of your product or service that they will be willing to pay this kind of price. And when you start working like this and you're doing value-based pricing, then it's so much easier for you to set your own price, forget about the competition, forget about what your costs are and just focus on what you want to price it at and figure out how much value you're delivering.
So to make this a little bit more concrete, this is what I mean. Let's just say that you invented, I don't know, a snow shovel. I'm literally just making this example up as I'm talking, but let's say you invented this special kind of snow shovel and for people that have to shovel snow off their driveways, they usually hired some neighborhood kids to do it and there's you know, spending maybe like $40 to get their their driveway shoveled every morning so they can go to work and it's like $40.
But now you have this new invention that will, let's say it's like a snow shovel heating pad or AI snow shovel and it actually does it, you know it works, it shovels the driveway by itself. So what are you, what kind of value are you delivering for that one person that was paying the $40 to have their shovel, I mean to have their driveway shoveled every single day than what 40 times how many other winter days there are is how much value that they are going to get by using your product. Then if your price is way under that value it's a no-brainer for them. They're gonna have to spend this money anyway. And let's say that your snow thingamajig is like $1,000. Would they pay for it? Hell yeah. They would pay for it, they were paying $40 a day. So 40 times 300. Well, let's see I should say 365. But this is assuming that you have snow year-round, you're not gonna have snow year-round and I think we'll go into analysis paralysis if I start going down that rabbit hole. But you get the point right, you get the idea, the idea is you can pretty much quantify how much value someone is getting based on what they're already doing for them to get their needs met.
And then once you figure out that value then you can figure out how you can come in there with your own pricing strategy and make it sensible enough. If someone's getting you know 10 times more value based on the price that they're giving, giving you, then that makes total sense. So if they're paying you, if they're getting around $100,000 worth of value and your product is $1,000. That $1,000 product all of a sudden looks cheap, right? Because they're getting $100,000 worth of value. It doesn't matter what your competition is doing, it doesn't matter what your costs are. The only thing that matters is your value that you're delivering to your customers.
So this obviously is my favorite pricing strategy, value-based pricing strategy. Because the other strategies to me are just there's no specialization. There's like it's like monkey sees, monkey do you're just looking at what other people are doing or whatever your costs are and just kind of tacking onto this. There's no creativity, that's the word I was looking for, creativity. Before I end this podcast, I do want to mention something very special. And this is value innovation, the concept of value innovation.
So the concept of value innovation is from the book Blue Ocean Strategy by Chan Kim and Renee Melbourne. And in this book, they propose this idea of value innovation and what value innovation is is where you are seeking to lower your costs as much as possible and drive up the value as much as possible. And when you're taking leaps and value and you're able to lower your costs, then you create a situation where you're creating value innovation and it's difficult for your customers to keep up.
So this is one more thing that I wanted to add onto when you're thinking about pricing strategy, instead of actually pricing high, you might want to price low if you're trying to create a situation where you're trying to achieve this value innovation and in the book the Blue Ocean Strategy, um what they say is for you to be able to figure out how to innovate with your value, you essentially just look at all the different factors in your industry that people are taking for granted, factors that should be reduced below whatever the industry standard is, factors that should be increased above whatever the industry standard is, and factors that should be created.
And when you start making a map of all these different factors and how you think, you can kind of change. Change it based on how you can drive up the value and just stop looking at what the competition is doing, um, and not copy them and just kind of like do your own thing. Then you create a situation where you can create value innovation and leap across all your competitors. Hopefully into a Blue Ocean, I hope this helps.
Boom. Bam. I'm out.
Continue your journey with me on my other channels:
So we're gonna talk a little bit about each of these. Competition-based pricing, this is probably the pricing strategy that most young founders use. And me personally, I think this is a horrible strategy because if you are looking at the competition, then you don't have a sustainable business, you're just chasing other people and you're looking at how other people are doing their business models and you're just essentially trying to copy. So Snapchat something, you'll be the Instagram, taking the stories away, right? You're not really innovating there, you're just kind of chasing wherever the market is. And this is competition-based pricing. You're just looking at how other people are doing this is essentially monkey see, monkey do you are anchoring your price based on the competitive landscape.
The reason why I don't like this is because what does that say about your company? It really doesn't say much. You can actually differentiate on price, imagine that, you know, this product And we'll just make an imaginary product, but product X cost $50 a month And there's also a product Y & Z, and they're all around the same price around $50 a month and you want to compete in that area. And if you come up with a similar price $50 a month, what is that saying to the market? Just saying, t just says that you are just like everyone else, there's really nothing different about you.
However, if you price your product or service really high, let's say you have, you know, product and I ran out of letters, I shouldn't have started with the last letters. But let's say you have a Product V. I'm going to go backwards now. So product V is your product. If you price your product at $400 a month, then people will at least take note of that and they'll say, why is this price so differently if all these other people are $50 a month, maybe there's something special about product V that makes it $400 a month. And you might get the interests of this other demographic that will be actually interested in your product just because you priced it at this higher price. So to me, I don't like competition-based pricing because you're just doing Monkey See monkey do. I like to base my pricing on and I'll go into this at the end of the episode. Let me explain what the two other pricing strategies are.
The 2nd one is the cost-plus pricing strategy. This is typically used for people who are selling physical products and they will look at all the cost it takes for them to make the product and get it into your hands. And they will just add some kind of margin on there. And typically people are using this kind of strategy because there is a lot of competition in the space and where they are trying to innovate is through their production process or delivery or fulfillment process, somewhere like that and they might try to compete on price that way with a physical product.
However, if you don't have any competition in this space and there's nothing unlike your product, then it's really difficult for someone to value what your product, how much your product might be. And when you have a situation like this, you actually can take advantage of value-based pricing.
So, value-based pricing doesn't look at your production cost, doesn't look at the competition, doesn't care about any of those things. What it looks at is who is the customer and what kind of value are they getting out of your service? And this is the key. The key is if you want to be able to price your product for you to be able to build, the type of company you want to build, then you have to know with who your customers are that will be willing to pay around that kind of price. So let's say you're, you're building something that's a little bit more pricey and this is where you're going to differentiate, well, you have to figure out who is actually going to get so much value out of your product or service that they will be willing to pay this kind of price. And when you start working like this and you're doing value-based pricing, then it's so much easier for you to set your own price, forget about the competition, forget about what your costs are and just focus on what you want to price it at and figure out how much value you're delivering.
So to make this a little bit more concrete, this is what I mean. Let's just say that you invented, I don't know, a snow shovel. I'm literally just making this example up as I'm talking, but let's say you invented this special kind of snow shovel and for people that have to shovel snow off their driveways, they usually hired some neighborhood kids to do it and there's you know, spending maybe like $40 to get their their driveway shoveled every morning so they can go to work and it's like $40.
But now you have this new invention that will, let's say it's like a snow shovel heating pad or AI snow shovel and it actually does it, you know it works, it shovels the driveway by itself. So what are you, what kind of value are you delivering for that one person that was paying the $40 to have their shovel, I mean to have their driveway shoveled every single day than what 40 times how many other winter days there are is how much value that they are going to get by using your product. Then if your price is way under that value it's a no-brainer for them. They're gonna have to spend this money anyway. And let's say that your snow thingamajig is like $1,000. Would they pay for it? Hell yeah. They would pay for it, they were paying $40 a day. So 40 times 300. Well, let's see I should say 365. But this is assuming that you have snow year-round, you're not gonna have snow year-round and I think we'll go into analysis paralysis if I start going down that rabbit hole. But you get the point right, you get the idea, the idea is you can pretty much quantify how much value someone is getting based on what they're already doing for them to get their needs met.
And then once you figure out that value then you can figure out how you can come in there with your own pricing strategy and make it sensible enough. If someone's getting you know 10 times more value based on the price that they're giving, giving you, then that makes total sense. So if they're paying you, if they're getting around $100,000 worth of value and your product is $1,000. That $1,000 product all of a sudden looks cheap, right? Because they're getting $100,000 worth of value. It doesn't matter what your competition is doing, it doesn't matter what your costs are. The only thing that matters is your value that you're delivering to your customers.
So this obviously is my favorite pricing strategy, value-based pricing strategy. Because the other strategies to me are just there's no specialization. There's like it's like monkey sees, monkey do you're just looking at what other people are doing or whatever your costs are and just kind of tacking onto this. There's no creativity, that's the word I was looking for, creativity. Before I end this podcast, I do want to mention something very special. And this is value innovation, the concept of value innovation.
So the concept of value innovation is from the book Blue Ocean Strategy by Chan Kim and Renee Melbourne. And in this book, they propose this idea of value innovation and what value innovation is is where you are seeking to lower your costs as much as possible and drive up the value as much as possible. And when you're taking leaps and value and you're able to lower your costs, then you create a situation where you're creating value innovation and it's difficult for your customers to keep up.
So this is one more thing that I wanted to add onto when you're thinking about pricing strategy, instead of actually pricing high, you might want to price low if you're trying to create a situation where you're trying to achieve this value innovation and in the book the Blue Ocean Strategy, um what they say is for you to be able to figure out how to innovate with your value, you essentially just look at all the different factors in your industry that people are taking for granted, factors that should be reduced below whatever the industry standard is, factors that should be increased above whatever the industry standard is, and factors that should be created.
And when you start making a map of all these different factors and how you think, you can kind of change. Change it based on how you can drive up the value and just stop looking at what the competition is doing, um, and not copy them and just kind of like do your own thing. Then you create a situation where you can create value innovation and leap across all your competitors. Hopefully into a Blue Ocean, I hope this helps.
Boom. Bam. I'm out.
Continue your journey with me on my other channels:
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