How to set your prices

#13

How do you set prices?

The only question I hear more than this is “Dad can I have a snack?”

Today, we're diving into a core element that's often overlooked yet critical to your business's success: Pricing Strategies.

How you set prices can either catapult your profits or cut into your margins, and getting it just right is more art than science.

Let’s get into it. 👇🏻

The Simple Strategies

Why it matters

Set the price too high, and you risk alienating your customer base; set it too low, and you're leaving money on the table, potentially crippling your business's growth and sustainability.

The right pricing strategy doesn’t just impact sales; it can define your brand’s market position and directly influence its long-term success.

What you’re aiming for is the “maximum willingness to pay”.

How it works.

Imagine you run a coffeeshop (like one of my fav clients).

If you had 6 potential customers, you would have 6 separate desires and abilities to pay for coffee. Some may love coffee and have a fat wallet; others may not like it much.

This is what economists call the “maximum willingness to pay.” It’s the highest price you’d be willing to pay for something, based on how much you want or need it.

Andrea’s max is $4. Frank must hate coffee - his max is $0.10. He’d probably only buy to warm his hands.

Microeconomics will tell you to set your prices by the revenue equilibrium — the point were you can make the highest revenue.

For this example, that’s at $1.99, because you get the most people to purchase. Andrea, Brett, Christy and Deb are all in.

For bootstrapped businesses, I recommend finding the PROFIT equilibrium, not the revenue equilibrium. Suppose your COGS were $1 per cup of coffee, the graph looks like this.

If you were to go by Revenue, you’d price at $1.99.

If you go by Profit, you’d price at $2.49, just below that $2.50 mark.

How to apply it.

To find the maximum amount your customers are willing to pay, you can explore different pricing methods to find the best fit:

1. Competitive Pricing: For the coffeeshop, this looking at what other coffeeshops are doing and copying it. It’s a pretty safe route because you know customers are already paying those prices.

   1. However, just because your competitors charge a certain amount doesn't mean they’re making a profit, so be willing to adjust to hit your best numbers.

2. Cost-Plus Pricing: This method involves some quick math. If it costs you $1.00 per cup of coffee after labor and COGS

   1. $1 × 2 = $2 (in product sales, this is your wholesale price)

   2. $1 × 2 × 2.2 = $4.20

      1. This method guarantees profit for you, but it might leave money on the table. You could be landing too high or too low, so it’s good to test for different items.

Testing Your Strategy

To really nail your pricing, consider conducting tests:

• Raising Prices: Try charging more than you think people will pay, and see if they still buy your product.

  • This works especially well for limited edition products, or variations like different colors.

• Lowering Prices: Have a sale and see if more people buy at a lower price point.

  • Compare the total revenue and total profit from a week long 10% sale on a product against an averaged week from an equivalent quarter. Is total profit higher?

These tests help you find that sweet spot—the perfect price where customers feel good about their purchase, and you maximize your profits.

I highly recommend dropping that prompt into your fav LLM (mine is ChatGPT) and having a little back and forth with the computer. You might be leaving money on the table!!

Closing thoughts

Pricing is about understanding the value from your customer’s perspective and using that knowledge to maximize your profits. It’s not just about covering costs or matching competitors; it’s about striking a balance that benefits everyone.

Catch you next week!

-Nate

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