This is a question that I hear a lot. New business owners often wonder how to choose a good price for their products and usually wind up shooting themselves in the foot because they don’t necessarily put much thought into it. I see it all the time. Someone invents something and they just calculate their price based on the cost of the product’s production. It took $3 to make it, so sell it for $6. Wrong!
This sort of thinking neglects how people perceive prices. When picking the right price for your products, you have to think about what makes your customers buy. If they’re thinking $6 is too cheap, then they’ll think that your product stinks, even if it’s the best on the market. Think about other products on the market that are similar. Let’s say that there’s something that’s much like the new widget that you just manufactured. It costs $5 but yours is better somehow. Charge more, just to let the consumer know that yours is better.
What are anchor points and how do they relate to product pricing?
It’s important to understand the anchor point that has been set in your consumer’s mind though. An anchor point is a price point that they’re already familiar with. In this case, let’s assume that your consumers are already familiar with your $5 competitor. They believe that widgets like that should cost $5. It’s tough to make them believe otherwise. If you sell yours for $6, you have an uphill battle to convince them that yours is worth $1 more. On the other hand, if you differentiate your product, the $5 anchor point is just a reference point and they’ll use it to justify the additional cost for your upgraded version.
Anchor points are everywhere. We’re not aware that our heads are filled with them but let’s take gas for instance. Right now, gas is $3.18 a gallon here in Colorado. I pulled into Sam’s Club last week and was happy to pay $3.13. That’s because my most recent anchor point was $3.18. Now think back a couple years. Remember the first time that gas crossed the $3 mark. It was tough to swallow. Everyone was carpooling; families were skipping summer road trips. It was just too painful to pay that much at the pump. That’s because our anchor points were all set below $2.99. Adding just one penny and rolling over to the $3 mark was horrible. Remember how it was the leading story on the news every night? And then we quickly blew through the $4 mark shortly thereafter. Some places in California even hit $5. Relative to those prices, now we’re happy to spend $3.13 Just a year ago when gas prices were hovering around the $3.20 point, I would have considered buying a new hybrid SUV because of the cost of gas, and now I’m thrilled with the low price of $3.13 and don’t even blink when I go to the pump. Funny how that works, isn’t it?
So what can we learn from this? Your prices should never be based only on your cost of manufacturing. They should take into account many considerations, but recent anchor points is one that you have to think about. I’ll hit on some other pricing factors next week. Until then, I hope that helps.