written by
Chris Gardener

How do You Decide How to Price Your Products or Services?

Pricing Strategy 1st F – Financial Security 4 min read

I’ve said this plenty of times before, but I’ll say it again: pricing is deeply psychological.

Take the number 9, for instance. As Neil Patel recounts, an experiment by MIT once found that when the same piece of clothing was priced at $34, $39, and $44, the $39 option was most popular.

Weird, right?

If you’re confused about how to price your products or services, I’d like to help.

But first, let’s dispel one particular myth about pricing.

Do I need to follow the market?

It’s easy to assume that this is exactly what you need to do, but what if that simply results in you coming across as too similar to your competitors? Where’s the differentiation?

This usually happens when business owners fail to think about what ‘market’ really means.

For instance, there isn’t a ‘car market’ - there are loads of markets for different cars. There’s high end, low end, new, used, and markets based on the vehicle’s performance. There are even markets for the car’s purpose (i.e. ‘family’ vs ‘status’).

Comparative pricing only works if you’re comparing against the right market. Consumers don’t compare pricing just to find the cheapest; they’ll usually compare to find the product which represents the greatest value (or least risk) to them.

Tried and tested pricing strategies

There are lots of pricing strategies, but three are used most often.

They are:

  • Market pricing: this is determined by supply and demand and results from companies within a market sector continually comparing their prices against one another. It can get a little out of hand.
  • Time and material pricing: favoured by construction industries, this helps you settle on a price which takes into account the cost of making the product (from the materials used to the labour required).
  • Pricing for value: this is much harder to define, but it’s a method by which products are priced by fully considering how much they mean to the customer.

The last one is my favourite. I always advocate this because creating value is more important than anything else when it comes to growing a business.

If you offer a customer something which provides shed loads of value, they’ll pay MORE than you think for it. Simple.

pricing strategies

How do you price your products or services?

DON’T copy what others are doing. That’s not smart, and it assumes they’re smarter than you.

But they’re not. In fact, they probably copied others anyway!

You’re being smart with pricing when you match your solution to a problem that’s big enough to demand a price in exchange for the solution.

Imagine I have a screwdriver, and you’d like me to do a job for you. How much would you pay me to help you?

Well, it depends on the job that needs doing! If you’re just putting up a shelf, the value of that screwdriver is relatively low. But if you need to fix a kitchen water leak, it suddenly become very valuable indeed.

And it’s the same screwdriver.

Unfortunately, far too many businesses overlook this basic facet of value. They price their screwdrivers the same as their competitors (or a smidgen below), or by simply looking at their purchase cost and plonking a bit of profit on the top.

3 Simple pricing steps (for value-based pricing)

Here’s how I would price a new product or service, with value FIRMLY in mind.

Step 1: Identify the ‘second best’ option

If your product wasn’t available, what alternative would the customer have?

How much does it cost? What advantages does it have over the third best option?

Lastly, what concessions would they be making when opting for second best?

Step 2: List the reasons yours is different

This is a psychological process for you, too. The more you understand why your product is different from the second-best option, the more likely you are to price it correctly.

Make a list of all the reasons the customer would be better to sign up with your service, and put a value against them, over and above the price they’re paying for second best.

Step 3: Run a quick calculation

To work out your price, take the price of the second-best option, add the value of your advantages and subtract the value of the second best’s advantages.

But don’t stick rigidly to the outcome. Massage that figure until it feels right, based on the increased value you’re offering as the top choice.

What's the difference between price and value?

Before I leave you to your sums, let’s quickly consider the difference between price and value.

Price is what your customers pay, but value is what they receive from you.

For instance, a private health plan may cost £10,000, but the value is reassurance, certainty, and no waiting.

If you buy a car and you’re into your cars, the price to others may be extortionate. But to you, the value is status (“this is who I am”). If we all bought on price, we’d all be driving around in old, second-hand bangers. And I’m pretty sure this isn’t the case.

There are so many examples of this, but no matter what industry we look at, they all relate to the same principle: the price a customer pays is nowhere near as important as the statement of value.

Value is SO much more than price, and that’s what you need to take into consideration whenever you begin a new pricing strategy.

pricing strategies