Regardless of what we tell ourselves, we tend to price our products and services by benchmarking them against what we currently offer or have always charged. There are easy assumptions to be made on what a client ‘would think is too expensive’, or likewise, ‘too cheap’. But have you ever actually asked?
How much do you really know about how your buyer/client/ target market feels about the cost and associated value of your products and services?
The simple ‘wide to narrow’ price sensitivity model below is unquestionably useful when you’re considering launching a new product or service, productising your existing services (e.g. breaking down clients services into ‘strategy’, ‘reporting’) or simply want to change your rate card or day rate.
So how does the model work?
First up, it’s worth noting that price sensitivity research is simple primary research that can and should be conducted by your internal team. It may feel a little odd at first – rather like wearing a new pair of shoes and especially if you’re traditionally ‘British’ in your business dealings – because this model requires you to ask the opinion of the very people you’re hoping would purchase or have a potential need for your services. If you’re already shuddering at the thought of a pricing conversation – please bear with me.
Here’s what you’ll need to ask (in whichever roundabout way you want to of course):
- At what price would you consider the product/service to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product/service to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product/service starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/high side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/good value)
IMPORTANT: before you start – know your proposition
Before you go about asking, there’s one thing you MUST have right, and that’s your proposition. You need to be completely clear on what it is you’re asking prospective purchasers to ‘value’. Be clear on what the product or service is, how it would benefit the client and what the key outcomes and deliverables would be. The better and more detailed your proposition, the more likely you are to get a true reflection as to how valuable (or not) the buyer would find it.
- What is your offering?
- How does it work?
- What are the beneficial outcomes and deliverables?
Here are a couple of examples as to how it might work:
Example one: launching a new SaaS solution
- You’ve clearly detailed your proposition, benefits, and outcomes
- You’ve asked the four questions above to some of your prospective buyers
- The results come back…
Q1.) The prospective buyers think £30,000 would be too expensive for them
Q2.) The prospective buyers say £10,000 would make them wary about the products effectiveness as ’too cheap’
Q3.) The prospective buyers say that £20,000 would be verging on expensive, but doable if the benefits were clearly defined
Q4.) The outcomes show that £15,000 would be considered a bargain for such a solution
The above data is invaluable. Or actually, you can probably value it at around £18,000. The hotspot which has been defined for you by the very clients you’re hoping will use this product.
Example two: day rates
- You’ve asked the same questions as above, this time asking your audience about their feelings towards a given day rate. Again, you still need a proposition here, what do you expect to achieve during those hours, who are they paying for and which services?
- Remember to ask more than one person!
- Assess your findings (examples below)
Q1) Five out of the five think a £3,000 day rate is too expensive
Q2.) Four out of five think £1,200 is too cheap
Q3.) Four out of five think £2,500 is expensive but worthwhile if the benefits will be far-reaching
Q4.) Five out of five say £1,500 would be a ‘bargain’ for a great strategy
Your sweet spot is defined as between £1,500 – £2,500.
Your opportunity is that if you can prove the product benefits to a client, you know you’ll get closer to the top end of that sweet spot.
Example three: budgeting
This third example can be referred back to work I did with a client. We used the findings from the four questions to inform the revenue figures for the business (by applying price to estimated sales volumes). It’s a far more robust approach than just picking a price out of the air.
Much of my advice to my clients’ centres around helping them to appreciate the value of the input from their existing or prospective clients. And whilst conversations on pricing might appear challenging or even awkward, they really needn’t be. Plus, I’d add that removing hours of guesswork and instead finding out what is truly valuable (and valued) by your target market is probably worth the initial awkwardness.
Hope you find this useful, do drop me a note if so and please share if it’s something you think others would appreciate. If you’re yet to sign up to my short weekly newsletter, Rambling On, you can do so, here.