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

The following is an excerpt from the book: Running Lean.

Can you imagine Steve Jobs asking you what you would have been willing to pay for an iPad before it launched? Sounds ludicrous right? Yet, you’ve probably asked a customer for a “ballpark price” at some point.

Well, that’s just backwards. Think about it for a moment. There is no reasonable economic justification for a customer to offer anything but a low-ball figure. They may honestly not know and this question only makes them uncomfortable.

It is not your customer’s job to set pricing.

An optimal price is one that is accepted but not without some initial resistance. It is your job to both set that price and convince the customer. Apple is a master at this. They manage to charge a premium for their products and get people lining-up for their products.

Pricing is considered more art than science but in the next series of posts I’d like to explore tactics for demystifying how to set and test pricing.

Principle 1: Pricing is Part of the Product
Suppose I place two bottles of water in front of you and tell you that one is $0.50 and the other $2.00. Despite the fact, that you wouldn’t be able to tell them apart in a blind taste test (same enough product), you might be inclined to believe (or at least wonder) whether the more expensive water is of higher quality.

Here, the price can change your perception of the product. Not just that, but there can be viable markets at both prices and the bottle you end up picking defines the customer segment you fall in.

Principle 2: Pricing is Relative
In their seminal book on Positioning – The Battle for the Mind, Al Ries and Jack Trout describe the concept of a product ladder which is how customers organize products into a mental hierarchy. Your job is understanding what alternative products occupy the top 3 spots in their mind. These alternatives provide reference price anchors against which your offerring will be measured.

Alternatives can be real or extrapolated. In both cases, they help when applying the relativity principle. Watch how Steve Jobs introduced pricing for the iPad in a brand new product category:

Steve Jobs skillfully anchors iPads against pundit predictions (who used netbooks for price anchors) and makes the iPad look like a steal. We’ll talk more on how to “pitch” your price in the next post. Lets talk about how you come up with an initial price to test first.

Determining a Starting Price Through Problem Interviews

These 2 principles come heavily into play during problem interviews. Because pricing and product are inseparable, you should not directly bring up the price of your product until you have a clear understanding of what you are building, for whom, and know what alternatives already exist. That is precisely what you set out to learn during problem interviews.

Lets see how this plays out in practice. One of my previous products, BoxCloud, was a file-sharing product that simplified the process of transferring large files. Now lots of people could have benefited from the underlying value proposition, but here is a sampling of what I learned from different customer segments:

Consumers
Existing Alternatives: Email, torrents, personal websites
Pain level: Nice-to-have
Price anchor: Free

Graphic Designers
Existing Alternatives: FTP servers
Pain level: Low for them, high for their clients
Price anchor: Value placed on easy setup and simple web-based interface for customers.

Attorneys
Existing Alternatives: Couriers
Pain level: High
Price anchor: $50 per transfer

I got even more varying responses from accountants, medical professionals, architects, photographers, videogame designers, etc.

The same product problem and solution combination could be positioned against a dizzying array of customer segments using different channels and price points. I ultimately used two other criteria – customer pain level and ease of reach, to prioritize starting with the graphic designer segment with a $19/month starter plan. I eventually positioned BoxCloud for small-medium sized businesses and launched a separate sister-product a couple of years later to address another segment – amateur/professional photographers.

Pitching and Testing Your Price Through Solution Interviews

Next time, we’ll cover techniques for pitching and testing your price with customers.

  • Anonymous

    interesting

  • http://zenhostel.jp Zen Hostel

    after opening not yet 2 years ago, 3 new “less expensive” competitors opened in this same “tourist” city and the Fukushima disaster’ 1 year anniversary is days away.
    We will not compete on price; we will instead add value, features and services over time.

    Thank you Steve for your advice during your “We don’t ship junk” response.

  • http://motyar.blogspot.com/ Motyar

    This is awesome!!

  • http://www.kickofflabs.com/ Josh Ledgard

    Great timing as we’re considering pricing for our next venture (http://www.siftsocial.com) now.  

    I agree with the notion that customers are inclined to always pick the lowest price, but you can test a pricing page on them and see what maximizes your return.  

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  • http://twitter.com/PricingNews Pricing News

    Great article on Pricing !

  • http://twitter.com/DipakPatel Dipak M. Patel

    Great use of customer interviews to test pricing.  Thanks for the posts!

  • http://twitter.com/Mimiran Mimiran

    Great point about different segments perceiving different value. You can’t be all things to all buyers. Find where you have great perceived differential value and go after that market.

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  • matansa

    Nice about matching price to the utility level and alternative costs… I’d skip, though, the part about positioning through perceptual high pricing for no reason that the post starts with, which is pure evil even if it’s part of marketing textbooks.

  • Tomáš Kouba

    Hi Ash, just a question. I’m reading your Lean Startup book right now and I’m curious – do you retake customer interviews with the same people (if the problem, solution or pricing changed)?