Today is a big day. An important day. One of the most important in the life of your business. Today you get to decide how much money you are going to charge your customers for the solution to their problem. Or at least begin the process of deciding.
You’ve got your Unique Value Proposition nailed down. Now let’s turn your attention to the Lean Canvas canvas box marked “Revenue Streams” and figure out what your pricing model should be.
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Why are we talking about pricing now? Because pricing is actually part of your product. Your price will help to define your product in the mind of your customer and determine who your customers will be.
It’s not easy, though. There are lots of variables and no magic answers. According to Charles Toftoy, associate professor of management science at George Washington University, pricing is “probably the toughest thing there is to do.”
To help you in your decision about price, Maurya has some helpful suggestions. First of all, realize that cost-based pricing is a mistake. Cost-based pricing goes like this: It costs me $1 to produce, so I’ll charge 2 times cost. Or 3 times cost. Or whatever. The truth is, it’s irrelevant how much it costs you to produce your solution. When you look at cost-based pricing, you are forgetting the most important consideration: your customers are hiring your product/solution to do a job and fix a problem. They don’t care whether it costs you $1 or $100 to produce. Can you fix their problem?
If cost-based pricing isn’t the right answer, what is? Value Based Pricing. The real consideration your customer has is the value of your solution, and that value relative to your competitors’ offerings. In other words, if I have a problem, what will it cost me to hire your solution to fix it? What will it cost me to do something different to try to fix it? And remember, cost doesn’t always mean or even necessarily mean price.
Ben Guild recently wrote a blog post about selling TV’s three different ways: FOBO, Craigslist, and Fulfillment by Amazon. Craigslist turned out to be the place where he made the most money (net profit), but there were also considerations of inconvenience, speed of transaction, security, etc. In the end, Guild suggests FOBO has the right combination of factors to be the choice for most people. The profit was higher with Craigslist, but the cost was least with FOBO. Your customers will consider price as well as other factors. How convenient will it be? How fast can I get it? Is assembly required? Is it safe? How confident am I that this solution will really solve my problem?
As you are considering your business model, look at similar solutions in your marketplace. You have a Unique Value Proposition, but you know who your competitors are. Let’s look at our business designed to help people find work after 60. Who is doing that?
Honestly, I don’t know that market well enough to know who all the players are. But let’s assume that one option is the in-person career coach. According to this article, a career coach can start at $100 per hour and can costs thousands. According to this article, a resume and cover letter writing service can set you back $250 to $1000 or more.
To solve our hypothetical job-seeker Bill Johnson’s problems, he may need something like career coaching, but perhaps needs assistance with resume and cover letter writing as well. Perhaps a pricing model of $500/month service X 3 months with a guarantee to keep working with someone after if they haven’t found the right job might work. Or a $2500 flat fee.
On the other hand, Bill might just need a good book. Peggy McKee over at CareerConfidential.com has an ebook she’s selling for $1.99. Maybe we could write an ebook and charge $1.98.
Bottom line: your business model will determine your competitors, and your competitors’ solutions will set the price anchors in your customers’ minds.
More helpful pricing guidance: keep your pricing as simple as possible. Keep your early adopters in mind and consider what they are looking for. Eventually, you may want to go with a more complex pricing model. Today, keep it simple.
So that’s it. Or at least enough to take a first crack at it. What are you going to charge for your product or solution?