We’ve all looked at an expensive price tag and thought, “well, that’s not fair…” and not bought the item. As a founder, this represents a huge problem because your customers could be the ones thinking that. Let’s take a minute to unpack the concept of fairness as it relates to pricing your products.
The Risk. Price your product too high and customers won’t buy because they don’t think it’s a fair exchange of value for money. Price it too low and your product may be perceived as low quality and it will put you in a tight spot financially, so it’s not fair to you, the business owner. So, how do you pick a price that’s fair for both you and your customers?
A “fair” price is achieved when two conditions are met:
the customer feels like they’re getting more value than the price point.
the business owner feels like they are making enough profit margin for their efforts.
When both conditions are satisfied, the price point is considered “fair”.
In order for a customer to feel like they’re getting good value for their money, your job as a business owner is to create and communicate as much perceived value as possible for each customer segment.
Let’s use an example to illustrate.
Let’s pretend you’ve created a platform that allows home-owning baby boomers to stay in their homes longer (and not move into a senior’s home) by making it easier to find, schedule and pay for a variety of home-related services like lawn care, snow removal, plumbing, odd jobs etc. Peace of mind is hard to quantify though, making it hard to know if your prices are fair. So, let’s consider another benefit you can deliver to customers with your product - time savings.
Assuming you can save them 10 hours of their time per year, and let’s say one hour of their time is worth $20/hour, you’ve created $200 worth of tangible, additional value. This additional value is made when your product is compared with the alternative solution, which is just calling around and booking services individually, which costs them $0.
So, how does this additional $200 in provable perceived value affect your pricing? How do you make sure your pricing is fair so that customers will actually buy?
The Ultimatum Game:
To understand what to do with this additional value you’ve created and how it relates to the fairness of your pricing, it helps to be familiar with The Ultimatum Game, outlined in this quick video below.
Based on this concept, you, the business owner ie. the “proposer” has $200 to share in this scenario, but you only get to keep some of the $200 if the customer, ie. the “responder” is willing to accept your offer. Which means that it’s in your best interest to split the $200 (ie. the additional value created) 50/50 to make it “fair” and increase the likelihood that the customer accepts the offer (ie. buys your product.)
Economists have repeated this Ultimatum Game study in countless ways and scenarios, and it always comes back to the idea that people, and customers in this case, are more likely to accept a price that is perceived as being fair, which means they feel like they’re getting good value for their money. You, the business owner, need to know what profit margin is acceptable to you in order to feel like it’s a fair exchange of money for value. So, when setting your prices, think about how you can split the additional value you’re creating, ideally 50/50, to increase the likelihood of a sale and your conversion rates.
Now that you see how it works, are your prices fair?