EBay started to market this data along with the feature. It wasn’t used much, Dearing says.īut it turned out that sellers who included the pictures had much higher click rates and tended to command a higher price for their goods. EBay, for instance, offered a feature from its inception that for 25 cents allowed people who sell products on the site to add a photo next to their listings. You can increase perceived value with better marketing. or Japan it may be that $10 a month is still cheap.” “It’s possible that in some countries, like India or China, $5 a month is too expensive,” Libin says. Libin recently started testing Evernote’s price in some countries to find out whether that’s cheap or expensive relative to perceived value. The company’s Premium accounts currently cost $5 a month. But more often, Dearing says, “If nobody’s buying my product, it’s because the gap between price and perceived value either doesn’t exist or it’s not large enough.”Įvernote is trying to measure that gap. But you should also focus on the gap between your price and how much value customers think it delivers, a concept known as perceived value.Ĭompanies often assume that if sales are slow they need to cut prices. Usually, companies fixate on the gap between how much their products cost to make and how much they charge for them.
“It’s a judgment problem.” Increase perceived value “Pricing is not a math problem,” says Dearing. Also take into account input from your customers and employees, what the competition is doing and your intuition. But don't rely on data alone to inform your decisions. You can A/B test it and use other analytics to refine it. In order to set a price, you'll need to form a hypothesis. Under these circumstances “the traditional model starts to behave in weird ways,” say Michael Dearing, a professor at Stanford University’s design school, who ran pricing at eBay for many years.
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And while you may spend a lot to develop software or a mobile service, over time the cost to produce additional units approaches zero.įurthermore, many startups have a new product for which there aren’t competitors for customers to benchmark against. Technology companies usually don’t have a finite supply of a product. Since demand tends to increase as prices go down, you simply adjust your price until you’ve maximized profits. You have a set supply of a product and there’s a certain level of demand for it in the marketplace. In theory, setting a price should be a rational economics problem. “If you picked your price once and never changed it, it’s probably wrong,” says Phil Libin, chief executive of Evernote.Ī more thoughtful approach to pricing can boost your company’s profits, increase customer satisfaction and help you discover popular product variations that you hadn’t considered.
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Startups in particular have a habit of setting their price low to attract customers and never raising it, or keeping a feature free long after it’s clear people will pay. But all too often it’s treated as an afterthought. Setting a price for a product is one of the most important decisions a company can make. Meanwhile, companies that didn’t properly assess the value of their products and price them accordingly struggled or fizzled out. At eBay, touting the benefits of a low-cost tool meant the difference between profitability and a loss. LinkedIn’s decision to package some seldom-used features as high-margin “premium” accounts spawned a business line that now makes almost $250 million a year. This Sequoia Guide covers strategies that can help you figure out the right price for your product-and end up with happier customers and more profit in the process. Pricing is as much an art as it is a science, one that relies as much on marketing and psychology as it does on classical economics.
A lot of startups treat pricing as a math problem or, worse, an afterthought.
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