Your product offering must follow some basic principles of packaging and pricing, so you make it easier for your customers to say ‘yes’ to what you’re selling.
In my last blog on product offering, I wrote about how choosing the right business model is essential to getting your product into the hands of the right customers.
Your business model, however, is only one-third of a successful product offering.
In this guide, I take you through the other two parts: packaging and pricing.
Follow these principles to build a strong foundation for a product offering that makes it easier for customers to say ‘yes.’
I’ll refer to both products and services interchangeably throughout because this approach applies to both.
Package Your Products in a Smart Way
You’ve determined your business type. You’ve found just the perfect business model.
The next step is to package your offer into a limited number of options.
If you’ve ever gone shopping for toothpaste, you know why this is important.
You walk into the store, head down to the toothpaste aisle, and find yourself overwhelmed by the number of choices.
Do you need to whiten your teeth or do you have sensitive gums? Do you like mint, or are you up for a more exotic flavor? How do you feel about different sizes, designs, or prices?
The number of options is overwhelming, and if you’re like me, you are left paralyzed by having so many to choose from.
Most of the time, you just pick the one that feels most familiar and get it over with because, after all, you need toothpaste.
So, is the alternative approach – to offer your customers just one option – any better?
When the Model T Ford was first released, it was known as an astonishing piece of technology, and for one more thing.
As founder Henry Ford famously said, his customers could have the Model T in any color they preferred – as long as they preferred black.
If you fancied buying a red model, for example, you were out of luck.
Henry Ford could get away with this approach because he offered a revolutionary new product with limited competition.
Most startup founders these days aren’t quite this lucky.
So, how do you find some middle ground?
Offer Three Options To Choose From
People’s brains can process and compare three options easily.
Any more makes it more difficult for your customers to understand and make a decision.
This often means they don’t make a decision at all.
Offering only two options to choose from is somewhat better, but then you’re not really creating a clear sense of choice because you’re placing each on an equal footing.
On the other hand, if you offer three options, you can subtly control which one ‘feels’ like the obvious decision.
A logical way to split these three options is to offer:
- an ‘entry-level’ package,
- a ‘mid-level/target-level’ package, and
- a ‘premium/high-end’ package.
Make the Middle Option the Preferred Choice
First, determine the optimal distribution of features and benefits that your customer can use in whatever it is you’re selling.
Then, make this the middle option of three.
Why the middle option?
Psychologists coined the term Center-Stage Effect to describe people’s tendency to choose the middle option from the set.
We tend to believe that the middle option is the most representative one, the one that makes us like everyone else.
In other words, we don’t go for the extreme to avoid standing out.
So make your middle option irresistible. It should offer the best value for money and make your customers feel like they’ve made a perfect choice.
Present Your Three Options Using One of Three Packaging Approaches
As a business coach and mentor, I’ve come up with the terms for the three main packaging approaches you can use to present your options. They are:
1. Distinct Sub-Products
Use this approach when every option appeals to different interests or audiences.
For example, take a look at Logiscool – an after-school coding program for kids.
They create three options, each one offering a distinct experience tailored to a different need or goal.:
- Coding – computer game tailored to age/knowledge
- Robotics – operating a robot, beginner & master
- Digital Discovery – digital skills, ages 6-8/9-10
2. Levels of Service
Use this approach when you want to offer different levels of the same service.
Each level should offer additional features or benefits not found in the less expensive one.
Let’s look at Syndicast, a service that promotes music labels’ latest releases to radio stations worldwide.
Their options are:
- Silver – basic tools
- Gold – more tools, basic promotion and reporting
- Platinum – even more tools, advanced promotion and reporting
They offer the same fundamental service, but the depth of features and benefits grows with each level.
3. Build One Service to the Next
In this approach, you offer increasing levels of service, as in the case of Levels, but your customer must start at the lowest tier and ‘build’ their way to the middle option and, eventually, to the premium option.
As a start up mentor, I’ve seen businesses confuse this one with the previous approach.
The key difference versus ‘Levels’ is that the customer can’t start the relationship at the level they choose. They must start at the entry tier.
This packaging approach is particularly useful if you offer a service that requires an audit or evaluation of the customer’s business before you can provide your full solution.
For example, Computomics is a data analytics tool that helps plant breeders identify crop varieties that generate the greatest yield.
Their choices are the following:
- Entry – audit of available data
- Target – in-depth analysis of data using standard methodologies
- Premium – tailored analysis with dedicated analyst
If you’d like to use Premium services, you’ll first have to go through Entry (audit of available data) and Target (in-depth analysis) options.
Clever Pricing Principles
Now that you understand how to package your product or service by offering three options, it’s time you learned the most challenging part of creating your product offering: how to set your price.
Why is this part of the process so challenging? Because it requires you to balance three factors:
1/The actual cost of making your product/service available for purchase
2/The psychology behind the question: ‘How much is my product/service worth?’
3/The price the market has set for similar products/services
Let’s start with the ‘easier decision’ first, which is based on simple math.
1. Determine Your Target Profit
Since the purpose of any business is to generate a profit, you need to make sure you charge enough so that it covers the actual cost of production, sales, and delivery.
These are also known as your Direct Costs or the Cost of Goods Sold.
You’ll also need to add the monthly cost of operating your business, including paying salaries, renting office or server space, printing and paper.
These are your Indirect Costs, which you need to keep paying whether you sell one product of 1,000 products in a given month.
Then you need to decide how much profit you’d like to have at the end of each month.
The combination of these three factors will give you one perspective on how much you need to charge for your product offering.
I use the term ‘need’ carefully because you may decide that you’d rather invest and generate a loss for a certain period to build your presence in the market.
Here’s the model in action:
Product Offering Price = Direct Costs + Indirect Costs + Desired Monthly Profit
A logical rule of thumb is that you shouldn’t price your product or service in a way that guarantees you will lose money on each purchase.
2. Decide Your Value
Your worth will be determined largely by how valuable your target customer perceives your solution to be to fix their problem.
In other words, the more valuable your solution is, the more it’s worth to your customer.
Don’t expect to charge 100€ for solving a 10€ problem.
On the other hand, you can easily charge 10€ to fix a 100€ problem.
Your customer will perceive this to be a good exchange of value and will gladly pay for your product or service.
After determining your value and its matched desired profit, the last step is to do some market research.
3. Conduct Market Research
The third pillar of your pricing strategy is to look at what others in your segment are charging for their services.
Those could be either:
- Similar service/product providers, or
- Direct competitors.
When determining the price based on these factors, going for the middle option may not be such a good idea.
It could be a good place to start, but it is certainly not where you will ultimately end up.
The most successful product offerings avoid the ‘middle ground’ and either compete on price (low) or quality (premium).
When it comes to pricing, the middle is “no man’s land.”
Different Pricing Approaches
Let’s explore some additional pricing strategies that’ll ultimately help your customers say ‘yes’ to your offer.
1. Package Pricing Psychology – The „70/100/150” Ratio
Let’s see what psychology says once more on determining the right prices for your options.
The general rule of thumb is to set the prices for your three options in a 70/100/150 ratio.
Why is this a good strategy?
It makes the middle option stand out.
Customers perceive it as a good deal compared to features offered at 70, but at a much lower price than the 150.
2. Set Prices (One-off, Recurring) And Potential Adjustments
Be ready to experiment with your pricing until you reach the right outcomes for your business.
You can try to:
- Test various levels and scenarios
- Explore the balance of supply and demand
- Adjust accordingly
3. Pricing Is Ultimately Set by the Market
At the end of the day, you’re going to need to pick a price and see how the market reacts.
After some experimenting, you’ll eventually find the right price for your product offering.
Both you and your customers will get the right deal at the right price.
Keep This in Mind
Your product offering requires a continuous process of development and feedback.
You not only have to deal with the natural decline in a product’s life cycle but with unexpected changes in a constantly evolving competitive marketplace.
Don’t get discouraged if you didn’t get something right the first time.
You’ll eventually achieve product-market fit – a perfect flow of your supply and customer demand.