A bottle of water can be 50 cents at a supermarket.
$2 at the gym.
$3 at the movies.
And $6 on a plane.
Same water.
The only thing that changed its value was the place.
This means that people are ready to pay a very different price for the exact same thing.
In this article, I want to show you how to find the right pricing, why you should charge more to your customers and what psychological trick you can use to get more sales.
2 types of approach to pricing
There are two types of approaches when it comes to pricing.
The first approach is called cost-based.
If you sell a water bottle in a supermarket, maybe it’s gonna cost you 20 cents, so your goal is to make a margin on top of that and sell it for 50 cents.
The second approach is called value-based.
If you take that same water bottle, but this time you’re in an airplane, since you’re the only person selling water, you can charge a lot more.
The value of the water has tremendously increased as it’s now a scarce asset.
And if you push this reasoning and sell the same water bottle in a desert to people who’ve been walking for 10 hours without water - how much do you think you could charge?
Potentially a lot more.
It’s the exact same water, the exact same cost, BUT the price will be totally different because the perceived value is a lot higher.
So how exactly do you find the right pricing?
The only way is to iterate.
The “sales” equation is always as follows if the perceived value is superior to the price, then you can technically charge more money.
If you look at the gap between price and value, you see that a typical strategy when you get started is to charge less and be super aggressive when it comes to price.
This is usually a cost-based approach.
Exactly like what Costco is doing, for example.
In the early days, it’s a smart strategy because you want to get as many paid customers as possible to get a lot of testimonials eventually.
But as you grow, you need to go away from that strategy because if your business margins change, your business can die.
What you can do is increase your value a lot so the actual value and the perceived value are extremely high.
And that happens thanks to a unique offer and good marketing.
The more your business grows, the more unique and irresistible your offer will be and, therefore, the more money you’ll be able to charge.
If you take lemlist, for example, we kept improving our real value and our perceived value over time, so we kept increasing our price.
But why should you charge more?
If there’s one thing to remember is that cash is king, and profit is oxygen.
Your margins will determine your cash flow, and your cash flow will determine your business growth.
Because if you have cash flow you can invest money into more growth.
For example, the more cash flow you have, the better the customer experience can be and, therefore, the more word of mouth you will get.
If someone pays for your product or service $10. How much of your time are you gonna be able to spend with that person? Close to 0.
However, if you charge $2000, you’ll be able to provide a much better experience.
But that’s not it.
In people’s minds, price equals value.
If I tell you that I’m offering you two nights at a hotel, between a $50 per night hotel and a $500 per night hotel.
Which one will you choose?
The second one.
Because a $500 per night hotel looks a lot better versus a $50 per night hotel.
Even if I haven’t checked the hotel at all I already have an opinion in my mind about it.
And finally, high prices will automatically filter out clients that are a real pain in the ass.
I remember when I made that tweet 👇
It reached millions of people because it is so true.
When people have money, they don’t spend it - they invest it.
This means that they’re expecting a good service, and they’re happy to pay for it.
People who are price-sensitive are usually a lot harder to deal with.
What’s the right pricing?
When you get started, the right pricing is the price you feel comfortable asking for.
So if you’re selling a product or software, what I would do is look at the competition and start with a pricing that is in the same range.
If it’s a service you’re selling, I’d look at what other people deliver for a specific price, and I would position myself for that.
Since we don’t see prices on websites for services, you can ask people you know to request a quote from your competitors to see how much they charge.
If I had to sum up, the ideal price should be higher than the lowest price where you don’t get any motivation to work. For example, $20 per day.
But it should be smaller than the price that gives you too much pressure and that you feel you’ll never be able to deliver. For example, $500 per day.
The idea is that over time you’ll keep increasing your price as you’ll get more and more confident.
So it’s important to be closer to that pressure zone - without burning yourself out or putting unrealistic deliverables.
Overall, no matter if you’re selling a product or service, you should always sell results or systems, but never your time.
The moment you start selling your time is the moment people will have control over the price they’re willing to pay.
There’s a story I really like to illustrate the difference between someone who never made any money and an experienced business guy.
Imagine someone selling a simple backpack for $100,000.
The guys who’ve never made any money will always say, “It’s too expensive for me.”
While the experienced businessman will always ask “What’s inside the backpack?”
As always, people who are experienced in business do not care about the price.
They care about the ROI or return on investment.
They focus only on the value you can deliver.
And that’s why you should always focus your effort on this persona.
Now that you have a clear idea of how to choose your price, there are 2 psychological tricks I want to share with you so you can increase your sales.
And then I’ll go through a little secret on pricing that you can steal 😉
2 psychological tricks to increase your sales
The first concept is called relativity:
When Williams-Sonoma introduced the bread machines, people had no idea how much it would cost, and therefore, the sales of the bread machines were almost inexistant.
However, when they decided to introduce a “deluxe version” that was 50% more expensive than the first option, the initial bread machines started flying off the shelves.
Just because people needed a comparison point.
So whenever you launch an offer, always make sure to present at least two options.
The second concept to build on relativity is called the decoy effect.
They did an experiment where they asked people to choose between 2 trips:
- One was a weekend in Paris in a 4-star hotel for $400
- The other was a weekend in Rome in a 4-star hotel for $4000
People picked Paris or Rome equally.
However, when they repeated the same experiment but this time added a third option that was:
- A weekend in Paris in a 3-star hotel for $400.
The vast majority of people decided to choose a weekend in Paris in a 4-star hotel for $400.
That’s because adding a decoy, which is an obviously less attractive option, will force people to pick the closest comparable option.
So whenever you want to showcase an offer, if you want people to choose a specific one, simply add a third option as a decoy.
The final pricing trick is for people who are a bit more advanced down the line.
It’s pretty useless to do that at the beginning, but as you grow, you need to remember it.
Tinder revolutionized the online dating scene with its simple swipe mechanism.
But the real genius is in its use of dynamic pricing for its premium features.
Essentially they decided to price the exact same feature at a very different price depending on the age, position, location, and gender.
By doing they managed to increase their lifetime value and revenue dramatically.
Simply because they understood that the willingness to pay varies depending on these parameters.
Obviously, a high net-worth individual in their 30s will be much more likely to spend more money on premium features than a student.
You will be able to find all the important parts of this video, including unique checklists and resources, in the description of this video.
Every week I’ll publish new videos on how to build and grow a B2B business that generates millions of dollars.
Without any BS and giving you practical templates that you can steal.
Peace, love, and profit 💰
G. ✌️
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