In his book "Maverick Startup," serial entrepreneur Yanik Silver lays out his "X Factors" for turning your big idea into a profitable business without taking on debt, partners or even a business plan. In the following excerpt, Silver guides readers through X-Factor No. 3, how and why to charge premium prices.
You have to charge a premium price so you can provide an extraordinary experience and value. People are banging their heads against the wall trying to undercut their competitors. I think that's totally wrong.
If you boil down my biggest profit windfalls, they come down to selling premium products and services at premium prices. That's how my business has leapfrogged from five figures to six figures to seven figures, and now multiple seven-figure gigs a year.
If you want to make an extra million this year, you'd have to sell 20,000 copies of your product at $50. Or 2,000 copies at $500. Or, better still, 200 copies at $5,000. It's a lot easier dealing with 200 customers than 20,000.
Related: Pricing a Product? Read This First
Here are six reasons why you should charge premium prices for your product or service:
- More profits. No surprise here. When you sell for higher prices, you make more profits. Very few companies have been able to sustain a low-price position in the marketplace. Sears couldn't. Kmart couldn't. And it remains to be seen what Wal-Mart does with that position. (And if you study Wal-Mart, you'll notice they are bringing in some significantly high-priced, high-margin products).
- Better customers. Price qualifies your customers more than you might realize. The ones that pay $7 for an e-book will be the ones who whine and complain the most and strain your customer support team. But in comparison, the customers who spend significant amounts of money are surprisingly easier to deal with and less demanding. Think about the last time you gave free advice to someone. What happened? Nothing. But if you had made them pay you for consulting, they would have taken the advice to heart.
- The psychology of pricing works in your favor. This is a big one. We've always been taught that "you get what you pay for." It's not uncommon for a prospective customer to discount a product or offering because it's too cheap. If the price isn't in line with what it should be, you'd think there is something wrong.
- You can deliver more value. Ultimately the value you provide will dictate the profits you receive. Increase the value, and your revenues go up. By selling high-profit products with high margins, you have more wiggle room to deliver sensational value. You can really wow your customers and buyers. Not only can you throw in high-value extras, you can also afford to deliver truly unique, unadvertised bonuses and follow-ups.
- Some buyers won't buy low-priced items. It sounds crazy, but some customers are only premium buyers. If you gave them a discount, it would actually decrease the response. Plus, some customers are only comfortable buying in the high-end range. I discovered this with my first high-priced offering. My Apprentice program was $14,500, at the time way above any other marketer. I thought my best prospects for this program would be customers who'd already bought from me and were happy. Surprisingly, about half of the people in this program had never bought anything from me. Their comfort level was secured by a premium offer.
- You will own the marketplace. This is the biggest reason of all. This means you can afford to pay more to acquire a customer. If I'm competing against someone who has a $100 product, and I have a $10,000 offering, I can spend more on pay-per-click Internet ads, more on traditional advertising, more on affiliate pay-outs, more on offline follow-ups, more on testing unusual advertising places, etc. And I can make bad results work for me. To make money for a high-priced product from a direct-mail campaign, I'd need only a fraction of the response that I'd need to make money from a low-priced product.
Most people are undercharging for what they provide. My rule of thumb is if you pay me $1,000 for a product, I want to make sure it delivers $10,000 in value. I suggest you consider something similar. If your product isn't good enough for you to raise your price on it, make it better.
Charging a premium needn't make you nervous about pricing yourself out of the market. The first step is to start brainstorming the value you provide.
First, find a trusted advisor, work with your team or just grab a blank legal pad and start coming up with answers. It doesn't matter how crazy they are. Just write them all down. Contemplate questions like: How can I provide 10 to 100 times the value my customers expect? What can I do that will amaze them? How can I get my customers the result they want on a silver platter?
With this information, the only thing stopping you from raising your price is yourself. You can always start small by adding a “Deluxe” or “Gold” version of your product or service and see what happens. I think you’ll be pleasantly surprised how you can double or triple your prices and still provide an incredible value.
Yanik Silver, a serial entrepreneur based in Potomac, Md., is the author of Maverick Startup: 11 X-Factors to Bootstrap From Zero to Six Figures and Beyond from Entrepreneur Press.