Don’t Ask Customers What They’ll Pay. Tell Them.

Also related is that you should aim for 3 tiers of product at 3 tiers of pricing. What will generally happen is people realise the bottom one tells the world they are cheap and skimping on product, and the top one tells the world they spend too much money and are getting too much product, so the middle one seems the right fit.

An apocryphal story about this is Wendys having 3 burgers with 1, 2 and 3 patties respectively. Not many people were buying the 3 patty version so they decided to get rid of it. The sales of the 2 patty version then declined because consumers had been using the existence of the 3 patty burger to justify purchasing the 2 patty one.

You'll notice that the iPad, iPod Touch and iPhone all come in 3 different different memory capacities. I can't find any sales figures by model, but I'll bet the middle ones are what sells the most.

This "3" approach also means you can still sell to the lower and higher end customers so you don't have to get your pricing perfect.

Edit: two additional links about this

http://www.asymco.com/2010/10/07/the-cognitive-illusion-that... (perception of alternatives)

http://www.wiglafjournal.com/pricing/2004/07/framing-the-pri... ("price framing")

I agree with this post - asking customers what they'll pay isn't always the best way to price your product.

However, if you do ever find yourself asking a customer what they would hypothetically pay for your product, never ask them "What would you pay for a solution like this?"

Instead, ask them "What do you think a 'fair and reasonable' price would be for this product?" It's a variation on the "what would you pay" question that tends to get a much more thoughtful, honest response.

Just a tip for HN from someone who has been in consumer insights and research for 10 years and has done hundreds of customer interviews around new products and pricing...

I would have used wine, rather than water, to illustrate Principle #1. At least with water, people generally agree that it's all the same and the $2 bottle is a ripoff. But with wine, you often hear about things like blind taste tests, where the cheap wines often come out ahead.

But it's more complex than that. People who buy wine may have other motives and will want a more expensive wine for whatever reason (special occasions, showing off, etc.). What's more is that one's experience of something like food depends on how you feel about the food. And price contributes to how you feel.

In other words, you might rerun the same taste test you did blindly before and have people pick the expensive wine the next time. So quality is complex: there may be both real and imaginary parts and which item people will pay more for depends on how it gets compared to the alternatives. And that's not even getting into things like branding, where people feel a certain way about a brand and that contributes to their enjoyment (or lack of enjoyment) of a product, etc.

This theoretically true statement "There is no reasonable economic justification for a customer to offer anything but a low-ball figure. " can, in practice, be irrelevant.

So unless you are a savant, following the OP's advice in enterprise sales can result in you leaving hundreds of thousands of dollars on the table. Because customers (especially at the early stage) often have a perceived value for something that is far more than you realized, or they have a budget, and their price is the budget. Steve Blank has great examples of these situations throughout his career.

The OP's advice makes sense for consumer sales (and I think he should clarify this).

This book gives a rounded and intelligent set of tools that work in almost all situations — and will make you rethink the thoughts you thunk about pricing: http://www.amazon.com/Winning-Profit-Game-Smarter-Branding/d...

Way too few startups use price anchoring strategies when presenting their prices - the iPad intro is definitely not the first, but possibly the most well-executed anchoring I've ever seen. If your product is disruptive in the sense that it potentially can replace a more expensive existing solution, you should simply point out the math - the higher the original number, the better, as even the higher price points you've been thinking up for your product will seem small. Interestingly, anchoring can also work outside of mere price comparisons. That is, sometimes it's enough to just present high numbers to effectively prime customers towards higher price points. The most famous example is Kahnemann's classical experiment on using subjects' (obviously random) social security numbers for anchoring:

"...an audience is first asked to write the last two digits of their social security number and consider whether they would pay this number of dollars for items whose value they did not know, such as wine, chocolate and computer equipment. They were then asked to bid for these items, with the result that the audience members with higher two-digit numbers would submit bids that were between 60 percent and 120 percent higher than those with the lower social security numbers, which had become their anchor." http://en.wikipedia.org/wiki/Anchoring

What about the humble indie bundle or kickstarter? Asking the customer what they want to pay has never been more popular.

I don't agree with this–or maybe I do. It's hard to tell without knowing what he means by "testing your price with customers".

I think asking customers "what would you expect to pay for this?" should be part of your initial usability or beta test with potential customers. 2 Reasons for this: (a) your target market has certain price expectations for products and (b) you might "tell them" what to pay and still be too low.

I just did this with a new product we launched. My lowest plan was priced at $9/month. We did a usability test with our target market and ask them (at the end) what they expected to pay for a product like this. Only 1 person said a number lower than $20/month–and they went as high as $100/month.

There's another way of looking at pricing that comes up more and more in my thoughts on starting a new business/product. I've been calling it "pricing in reverse". I'll blog about it soon in more detail, but the gist is...

As a new startup or business, it's likely you have no audience, no fans, and no customers. You are going to have to go get them. One method, that can be very effective to get them if you do it right is online advertising through pay-per-click ads on places like Google/Facebook/LinkedIn.

Assuming you pick some niche with X searches, those ads are Y per click. And the per unit revenue of my product is Z.

Making bold but average assumptions about your conversion rates you can say something like let's assume 1% of searchers click on my ads. So my ad cost is going to be searches * CPC * 0.01.

Assuming I can get a 1.5% conversion ratio the revenue I'll bring in is searches * 0.01 * 0.015 * Z.

So:

Revenue(searches * 0.01 * 0.015 * Z) - Ad Cost(searches * 0.01 * CPC) = profit.

Set profit to zero and solve for Z. Get searches and CPC from the Google adwords tool.

You'll now know your product NEEDS to cost Z to break even doing pay per click ad campaigns.

Sometimes this is going to be an eye opener for you. You'll realize that you probably need to charge a ton more and so maybe your product needs to have a much more powerful feature set to warrant that higher price.

This example and thinking was inspired from Tim Ferris' Muse Math:

http://www.fourhourworkweek.com/bonus/pdf/musemath.pdf

If you want far better information on pricing, the following old (2004) article by Joel Spolsky is excellent.

http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...

The video embedded in the article is great. Steve jobs literally gets the crowd to cheer for "unbelievably low price" point of the ipad at 499. Brilliant

Nice, I totally agree with the fact that pricing of product is an art to attract the customer before your product is being released.