When Pets.com collapsed in November 2000, it took $300 million in investment capital with it. In doing so, it became the poster child for everything wrong with the dot-com boom. While there are a number of reasons for Pets.com’s failure, one of the most important culprits was this: the company consistently undercharged its customers.
In order to quickly grow the customer base, they offered steep discounts and free shipping. In fact, the company was selling products for 27 percent less than it cost to purchase them. It was a business model that was built to fail – and it did.
Competing on Price? Think Again
Competing on price is a common fix for poor marketing. It invariably results in a devalued perception of the business’s products or services, inadequate customer support, and a constraint on the ability to grow margins. Lowering prices is a trap that’s very difficult to escape.
Once consumers purchase at a discount, there is significant resistance to paying full price. Pets.com eventually realized their business model was faulty, and tried to shift to products with thicker margins. But in doing so, they struggled to shift perceived value.
However, raising prices by focusing on delivering more value than your competition enables you to charge a premium while increasing demand. At the same time, it communicates the value of your offering. Ultimately, higher prices lead to better customers, who have a better understanding of your offer’s true value.
4 Smart Ways to Raise Prices
Convinced that raising your prices is a good idea, but not sure how to go about it? Here four ideas to get you started:
Increase Value Perception
I like to use the phrase (one I stole from Dan Kennedy) ”selling money at discount” to describe a customer’s perception that you are offering more value than they are paying for. This means that if a customer is getting 10 times the value of what you’re charging, they aren’t going to question the price. I recently worked with one client who was able to raise the price of a monthly program from $50 per month to $200 per month. The reason? His clients had a very high value perception of his offer.
Link Price to Results
It’s natural for a prospect to object to a higher price. But what if you could guarantee the result that they were after? The classic example is Nordstrom’s famous lifetime guarantee. Anything purchased from Nordstrom can be returned, at any time, for a full refund. It completely removes the risk from the customer’s buying decision, and at the same time, conveys the quality of their products.
How about if you pay for performance? In this model, you are assuming all of the risk. If you fail to deliver on your promises, you don’t get paid. At the same time, your client can pay you out of the profits you have made for them (this is exactly how I run my consulting business). When you are “printing money” for your clients, you have a lot more leverage for charging higher prices.
Move to the Next Psychological Price Hurdle
In Marlene Jensen’s book, “46 Ways To Raise Prices Without Losing Sales,” she discusses the importance of psychological hurdles when determining price. These hurdles are the maximum price that you can move to without hurting sales. Want to know how high you can raise prices before hitting resistance? Try split testing to see if a rise in price hurts your sales. If you are already over-delivering exceptional value, you may be surprised how much price elasticity you have!
Provide Education Services
Your product may provide huge value, but not every customer will be taking full advantage of all it has to offer. Providing educational services (like the Apple Genius Bar) as an add-on to your product will immediately enable you to raise the amount you charge. It will also increase the value perception, simply by increasing the likelihood that your customer achieves the result that they are after. The more they know, the more value they can get from your products or services.
In our modern, interconnected world, word-of-mouth advertising (based on the results you have delivered for your customers in the past) is some of the best marketing you can do. Competing on price is a race to the bottom – somebody will always be willing to undercut you. Even if you win your price war, the damage to your margins (and the perception of your brand) will often send you down the same path as Pets.com.
This article has been edited and condensed.
Known as “The Entrepreneur’s Marketing Champion,” Charles Gaudet offers more than just business and marketing advice – he helps entrepreneurs push beyond what is considered “ordinary” to build great companies. His advice has appeared in worldwide media such as Forbes, Inc. and Business Insider. He’s the author of “The Predictable Profits Playbook,” an international speaker and business coach. He can be found at PredictableProfits.com. Connect with @charlesgaudet on Twitter.
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