Hey guys, Ken Courtright here from Today’s Growth: Growing Business Today. We are going to jump right into Episode 26, “The Power of Pricing.”
I call this one, “The Danger of Running Your Business with Your Own Checkbook.” What I mean by that is everyone has a talking checkbook. Everybody, no matter how much money you make, no matter how much revenue your business runs, when you open your checkbook, it either says “Yes” or “No.”
You say, “Hey, can we take the kids to Disney?”
Sometimes you open the checkbook, and it flat-out says, “No.”
Don’t Price Your Products As If You Were The Client
Everybody has a talking checkbook. Many businesses, especially small businesses and solopreneur businesses, price out their products and services as if they themselves are a client, which they’re not. This is so dangerous, especially in the small business case, where they have no budget or time to do true market testing. More often than not, this type of pricing leads to dangerous roads. If you have not performed actual market testing, whatever you have priced your product or service at is simply a guess.
There is a great Sam Walton story. I don’t remember if it’s the ‘70s or the ‘80s, but I know the story vividly. Sam was driving himself nuts trying to sell a lawnmower for $119. He tried end caps that said, “Tremendous lawnmower around the corner.” He put flags in the aisles. He knew this was a good lawnmower, and people would be satisfied. He was pulling his hair out.
Finally, he had an idea. He thought he should sandwich the lawnmower with an entry-level lawnmower, one without an engine, where you push it and it just spins blades. He put one to the left of it. I think it was $39, very inexpensive. To the right, he put in the $509 lawnmower, and that would be $2,000 today. All he wanted to do was sandwich the one he wanted to sell because he knew Walmart shoppers don’t have budgets for the $500 lawnmower. He knew he was wasting shelf space, but if it would get people to notice and purchase the $119 lawnmower, more power to him.
To Sam’s surprise, and I think this turned into a Harvard Business Review case study, 17% of the lawnmowers sold were the big $500 lawnmower. He was shocked. But it did do what he was asking. He wanted to sell the medium lawnmower. And it started moving like hot cakes.
Before I get into the psychology of why this works and how you can take advantage of this with your product or service, I want to digress a little bit. There is another tremendous pricing story I’d like to tell.
People Buy The Company Story
Dan Kennedy wrote in his book No B.S. Marketing to the Affluent that the number one reason the affluent make a buying decision has nothing to do with the price. It has to do with the company’s story behind the brand. When a gentleman is looking at three different $30,000 watches, he is not really looking at the watch, per se. He is Googling the background story of what this family went through to get this thing made. What is the back story? When he is playing poker with his buddies, he can explain the story behind the watch. He did not buy a watch; he bought a story.
Let’s get into the psychology here because pricing has been used as a strategy for years. In the car business recently, there is a very new case study that is the difference between Hyundai and Tesla. Hyundai, a massive billion-dollar shipping company, has been shipping all over the world for years. They are in trains, cross-world freighters, shipping on the oceans. Hyundai wanted to break into the car business, and their whole strategy was based on price. They wanted to be the lowest-priced car in the market. That’s what they did. I think they started in 1986.
They grew market share, they increased quality, but they kept prices down. Finally, three to four years ago, they opened up the Genesis line. The Genesis is to Hyundai what Infiniti is to Nissan, what Acura is to Honda, what Lexus is to Toyota, etc. Hyundai’s Genesis is a phenomenal car. If you take the badge off the front of that car, and Road & Track does this annually, they take the Mercedes badge off, the BMW badge off, and they take these new entry cars and blindly rate these cars. Genesis almost every year outperforms the Mercedes and the BMW in the blind road test.
On the flip side, instead of coming in low and then building a premium brand, Tesla did the exact opposite. Tesla entered the electric car industry from the top. They made a $70,000-$130,000 car. You couldn’t even get financing. It was either write a check or nothing. Their market was very specific. They went top-down.
After eight years, and you could definitely say total domination in the electric car industry—it’s the safest car in the world, there have only been two deaths in eight years—they are going in with a $32-$38,000 car. Elon Musk says they will dominate that space.
Here is what I recommend. How do we take advantage of pricing as a strategy, pricing as marketing? I recommend you do a digital footprint of your #1 product. Whatever product you move the most, do a digital footprint on it.
My Product, My Price, My Features, My Benefits
Write down on a white board five columns. Your product is column one. At the top of the first column, you will write “My product.” Down the left side, you will write, “My product,” “My price,” “My features,” and “My benefits.” Product, price, features, and benefits. Then you will describe all of those things. You want to use the descriptions that are on your website and brochures.
Then you’re going to have to take the understanding that product, price, features, and benefits, only one of those four, in your industry is the number one determining factor of what moves your product. It could be pricing. In very few industries does pricing determine the purchase. Benefits almost always is the big one. Benefits is almost always the lead dog.
Next to your digital footprint, I want you to do four competitors. Write down the product, pricing, features, and benefits for the four biggest competitors in your space. Don’t say that you don’t have any competition. Find something similar. This is just an exercise.
I want them to do it from the biggest companies, even if they aren’t the bestsellers. Pick massive companies. Here’s why. When you look at the features and the benefits of these four other products, especially if they are from really large companies, the largest companies in the world have copywriting budgets. They pay incredible attention to the copywriting, meaning the descriptions, the vernacular, the narrative that describes the features and the benefits of their products. They know good copywriting can make or break a product. There is no question.
I believe if you can do four, or even ten digital footprints of the competition, I have never done this for competitive scans and not seen a clear pattern where something is incredibly jumping out at me of an area of opportunity that a client isn’t taking advantage of. I’d rather give you an example actually. To see this or smell this or sense it, you have to map out enough of these competitors so you can see if there is a pattern that builds.
Let’s say we are a 25-person company, and we make what we believe is a tremendous wool sweater. This is all you sell. You only sell this one wool sweater that comes in four different colors. What I want you to do is get the product name, pricing, features, and benefits of 4-10 of the biggest wool sweater companies in the world. I think you’re going to notice that many of your competitors, especially if they are backed by a really large company, the narrative they use to describe your sweater is often drastically different than what you have. If you are a small business or you worked for another wool sweater company but never really paid attention to these things and have now started your own business because you thought you could make a go of it, these bigger companies, their narratives, have been chosen because of testing. They ran split tests of different websites to different people, and one of the split tests was selling more than the others, so that is what they are running with.
Let’s say that in the narrative, you notice that maybe a third of these larger companies, when they are describing their wool sweater, right at the end before you check out, what if they were all offering some sort of luxury service or an upgrade like “next-day free shipping?” Maybe even a free monogram of your initials right at the wrist of the wool sweater. That was huge a while ago.
If you noticed a pattern, and you noticed the biggest companies in the world offering some type of luxury service where it’s next-day or monogrammed, would it make sense, if you see that as a pattern, maybe to try to one-up these people? If they call it a luxury service, why don’t you call it a concierge service? If they place the order by 9 am, maybe even a same-day service. If you can get it somewhere by 10 am, two of the biggest carriers now offer same-day shipping. Maybe you can one-up them on service and get it shipped same-day. Instead of the monogram, how about a matching scarf?
My point is this. I think you will clearly see your grand-poo-bah lawnmower—Sam put his huge, more expensive lawnmower in Walmart—so maybe the scarf isn’t even big enough. I’m thinking if you want to move your wool sweater and want it to cool and sell, you need something to the right of it that is two to three times more expensive, but it includes your wool sweater. It could be the concierge service, it could be the monogram, plus a scarf, plus this. You could give them a whole ensemble. You’re obviously charging for it; you’re not giving it away for free. It’s a major upsell.
To the left of your wool sweater, maybe you have an entry product that is not a full-blown wool sweater. It could be something in the same color or pattern.
Start Split Testing Your Pricing
If you want to see stuff fly off the shelf, start testing with pricing. Start split testing. Start sampling. I remember back in the day when we launched our authority sites. We had one product with one set price. Today, we haven’t sold anything that expensive in years. The reason why we climbed up the ranks is we found what people were buying when people bought our authority sites. They were adding Facebook interns. They were going to pay-per-click companies. They were adding all of these things to it. So we said, “Wait a minute. Why don’t we offer a concierge service, package all of the stuff that they are buying after they buy our thing, put it together, and offer that up?” Sure enough, that’s what sells today for literally ten times more than what we used to move it in the marketplace for.
Let me summarize this. When you are launching anything new, or if you want to resurrect an old product, I want you to try a three-tier pricing. I want you to consider whatever you see today in your mind’s eye as the price for your product. I want you to find a way to make a light version, an entry level version. If your product is $5,000, what could you offer the market as a taste of your product for only $1,000? It’s 20% of the cost. This is the push mower in Walmart.
Then you have yours positioned in the middle. What you do is take your product, go to that digital footprint, look at all of the features and benefits, and find out what the world is already buying from these other places. That is a much more expensive add-on. Maybe your product to the right of it is a grouping of three wool sweaters. It’s a very expensive package with tremendous value. You will be so surprised at how many of the larger packages you start to sell because there are a lot of people out there. If it doesn’t look out of their reach, they won’t buy it. If it isn’t priced into their comfort zone, where it’s still expensive, they don’t think it’s worthy. Many people buy automobiles this way; they always buy a little more expensive than they know they should. They want to be on the cutting edge of value. They are value-driven, not price-driven.
As a matter of fact, price on the low end scares them. To them, there is a certain type of person out there that says, “I know business. If this thing is this inexpensive, I know the company still has to profit. If they’re not profiting, they won’t be around to service me later.” They don’t want to buy something inexpensive because they are afraid they are going to have to buy it again later. They want to buy it right now.
Let The Market Determine Your Pricing
The lesson here is this. Do not price your products with your checkbook. Get yourself subconsciously out of the way. Let the market determine what your product should be priced at. How do you know that? You offer it up at the price you have it today. Position it with something lower to the left and something much higher to the right. When you start seeing your market right on your very own website buying something much more expensive than you have ever sold before, then you will take a good look at the middle piece of what you’re moving. I think you will find yourself recreating your product line. I think you will find yourself using this three-tier pricing in other things. The biggest surprise of all is when you study that digital footprint of how the market does the narrative for the features and benefits of your competition, I think you will realize how much work you might still have on your own narrative.
I think you will find this exercise fascinating because pricing is a strategy. Pricing itself is a marketing concept, and pricing definitely has changed our company in 23 years. From what we learned in our early days to what we are doing today for ourselves and others, pricing is a secret weapon.
I am Ken Courtright from Today’s Growth: Growing Business Today. Take care, everybody. See ya on the trail.