While you may think your products or services are the best on the market, that opinion is only your perception of them. Unfortunately, it’s your customers’ perception of your offerings that determines their prices and your success.
This price is based on the “value” your customers attribute to your offerings, and this determines the maximum amount of money a customer will pay for your products or services.
Before you launch a product—whether you’re just starting the business or have successfully sold similar products or services in the past—consider the following elements when establishing value and determining a price for your offerings.
1. Solution for the Customer
What problem are you solving? How are you going to make customers’ lives better?
If you can’t answer these questions definitively, customers will have a hard time finding value in your product. On the other hand, most customers will pay a premium for products or services that solve serious problems for them or measurably improve their quality of life.
Increase your perceived value by detailing exactly what customers stand to gain if they do business with you.
2. Product Usage
How will customers use your product or service? Will they use it hourly, daily, monthly or just once a year?
It may be hard for customers to justify an expense for a product that they rarely use, especially if it isn’t some sort of durable good. If yours is a product or service that customers can use often, especially if doing so is convenient and easy, customers will place a higher value on it.
3. Brand Recognition
Do customers seek out your brand over others? Do they trust your brand more than your competitors?
Because the brand is so well-known and easily recognizable, Nike shoes usually have a higher perceived value than sneakers from a generic brand. People are willing to pay a premium for that little swoosh because they know and trust the brand.
If you are just starting out, you likely don’t have that trust yet because your brand hasn’t had the time to accumulate value. In most cases, you’re going to need to initially beat the pricing of your more established competitors in order to convince customers to take a chance on you. This way, your first customers can tell your next customers about how great your product is, and this word-of-mouth advertising will definitely increase your brand’s value.
4. Market Size
How many consumers are willing to purchase your product or service?
Your product or service’s perceived value increases as your market size and share increase. If you serve a small niche audience and have few competitors, the value of your products or services is much higher than if you are in a competitive market. If your market is large and crowded by competitors, you might have to fight harder for a smaller piece of the market than you’d like.
5. Market Demand
How much do your customers need or want your product?
While every human being needs food to survive, no one needs pricey Wagyu beef or caviar, but many are still willing to buy both. If yours is a product or service that people can’t live without—or even just one that people refuse to live without—the perceived value is higher.
Another factor in market demand is the “coolness factor.” People want what’s “in,” and they’ll be willing to pay top dollar to have the most up-to-date or trendiest items on the market.
6. Customer Alternatives
How many competitors are you up against? Are you operating in a saturated market?
If customers can easily go “down the street” to find a similar product or service, they’ll view your offerings as less valuable.
7. Competitive Advantage
What do you offer that your competitors don’t?
Creating a unique selling proposition is a great way for you to understand how you stack up against the competition. How you differentiate from all your competitors is what will drive up the perceived value of your business and its offerings.
8. Your Competitors
How does your pricing, product quality, and customer service compare to competitors?
Most consumers base their purchasing decisions on what they can afford. Take a look at your closest competitor. If you aren’t matching their prices pretty closely, you better be beating their prices; if not, you need to provide customers with a really good reason to pay more. Your products should also be of higher quality and function better, and your customer service should outshine the competition as well.