Experiment with price to find sweet spot

Higher price point could be right, but you won’t know until you try
Sacramento Business Journal - by Wil Schroter Contributing writer

Any entrepreneur who has ever tried to bring a new product to market must deal with one frustrating fact — no one knows what to charge for it.
No matter how well you think you can predict the market or how much research you’ve done, until people start paying for your product, you’re still just guessing.

Even when people begin forking over their hard-earned cash for your product, you still don’t know if you’ve optimized for the best possible price to generate the greatest number of sales.
Fortunately, there are some simple strategies you can employ to give yourself a little peace of mind.

The binary nature of pricing
The first pass you’ll want to take at pricing is to eliminate all of the people who weren’t going to pay you to begin with.

When it comes to a consumer’s perception of pricing, it’s not always the actual amount that scares people; sometimes it’s whether or not they have to pay at all. Pricing is more or less binary for consumers — they are either going to pay or they won’t. The actual price is incidental.
Having launched 10 companies myself, all in different industries ranging from automotive to financial services to television casting, I can tell you that I’ve seen both types.

There’s something that goes off in a customer’s head when he or she must pull out his or her wallet. Up until that point, the value you were providing might have gone relatively unnoticed. But when the customer has to break out the credit card, they give the value of the product a second thought.

Instead of developing your pricing to lure the group of people unwilling to pay for your product, focus on maximizing the yield of those who will. It’s a lot easier to get someone to pay 10 percent more for your product than it is to reduce the price in the hope that more people will buy it.

The ‘freemium’ model
Next, you’ll want to figure out how to separate the paying customers from the non-paying customers, without alienating either.

Leave it to overzealous Internet nerds like me to invent a word like “freemium” to explain a basic price gateway model. Freemium is a word used to describe giving a portion of your product away for free in order to attract interest, then charging the most passionate customers for premium benefits.

I’m not entirely sure, but I think this model was pioneered by Baskin Robbins every time it handed me a free sample of chocolate ice cream in order to convince me to buy an entire cone. These days the freemium model appears on iTunes. I can listen to a sample of the song for free but have to pay to download the whole song onto my iPod.

The beauty of the freemium model is that it lets you test two pricing strategies simultaneously. You get to see how many customers would be interested in your product for nothing at all and learn what about the product people are most interested in paying for.

It pays to try everything
Once you’ve separated the paying customers from the non-paying customers, you still need to settle on the right price to charge. There’s one simple answer here: Try every possible price.
I’ll give you an example.

At Swapalease.com, a site that allows people who want to get out of a car lease to connect with people who want to get into a car lease, we charged people to post their car leases online. The problem was, we didn’t know how much to charge them, so we tried every possible price.
Our early estimates figured we would probably get around $24.95 per posting on the site. We constantly tried new pricing strategies to figure out what would be the right price that consumers would accept.

Wouldn’t you know that after six months of testing, we found out the number was more than $100 per post.

Had we gone with our gut instincts, we would have vastly undervalued the product and left a whole lot of money on the table.

The only thing you can rely on when picking the price of your product is having to change it — a lot.

If you can develop a system to test as many possible price points with as many consumers as possible, you can hopefully uncover that hidden gem that is your perfect price. Until then, keep trying something new. It’s the only surefire way to win.
WIL SCHROTER is a serial entrepreneur, author and chief executive officer of Columbus, Ohio-based Go Big Network. Reach him at wilschroter.com.