How Much Should You Charge?

Courtesy of Rentoid

In an age where anything and everything is trending towards FREE, companies face many increasingly thorny dilemmas on the issue of pricing. What should one charge in order to make a profitable and sustainable living? How can one stand out from other similar businesses using price as a lever? Is there a trade-off between the number of users/subscribers/fans and actual paying customers?

Answering these questions isn’t easy. One can either choose to go with one’s gut (ala Malcolm Gladwell’s the Law of Thin Slices) or perhaps embrace a more methodical approach.
Thinking aloud, here’s what I would do:

First and foremost, make sure that you’re in the right line to begin with. Is there value in what your company does and potential to offer a compelling and unique proposition? What is your complete product portfolio and how are they positioned – economy, deluxe, premium, or premium plus? Have a sense of how you can differentiate yourself from the hordes of other businesses out there and sharpen your product/service offerings before even thinking of slapping on any charge.

Next, survey your landscape. Consider what your competitors and other substitutable product/service providers are doing. Are there industry trends already prevalent on the nature of how such businesses charge? It is critical to have a good feel of what’s happening in your immediate business environment as consumer expectations are often shaped by what’s already out there.

In my business of museums and attractions for example, it is common for entities in this space to charge a gated entry to their most prized visit experience, while possibly offering free access to other spaces. Revenue streams are often spread out between different sources – from ticketing to tenancy rentals, merchandising, facility sales, to add-on services (eg tram rides, guided tours etc).

Thereafter, pore over how potential customers might behave from a cultural and socio-psychological point of view. Hire or consult experts in the field of consumer psychology or sociology who can highlight the thinking and socialising process behind purchases.

Apple did a brilliant job in this space with iTunes. They understood that paying a double or two each time is far more attractive to a customer in purchasing music, than dumping 15 bucks for an album when you only like one or two songs.

Consider auxiliary sources of income from add-ons, downstream services, or bundled products. If you make your main product free (or very cheap), are there premium upgrades that you can charge for? The world of technology products and services are full of such examples, but it doesn’t stop there. Brick and mortar businesses have also done that for years, calling the initial free or cheap offer a “loss leader” so that profits can be made from other more profitably priced products.

Finally, remember to do a business model and a financial pro-forma projection. If necessary, consult a financial expert to ensure that your cashflow, balance sheets and overall financial position is in order with different scenarios (optimistic, realistic and pessimistic). While nobody (perhaps except the apostle John and some say Nostradamus) could predict the future, it is prudent to consider how different pricing models coupled with forecast demand would affect one’s business viability.

Two examples of such models can be found below. The first is the price-profit-quantity curve, which maps out the relation between cost, quantity, price and potential profitability:

The price-profit-quantity curve provide a useful basis for determining the impact of different prices on one’s profitability (courtesy of Jim Luke’s Microeconomics)

The second model below is a commonly known price-sensitivity analysis, which maps out the anticipated responses of consumers/clients based on historical information and projected behaviours in relation to different prices.

Courtesy of Market Decisions Corporation