Step-by-Step Instructions

Click to open worksheet

Problems it Solves

1. What's your optimal price?

This chapter will show you how to find your optimal price point.

2. How to run price tests without losing customers

You'll learn how to charge different customers different prices without upsetting anyone.

3. Provide enterprise negotiating strategies

How do you get the optimal price in enterprise sales when you're not sure of the client's budget?

Pick a Path

The first thing you will need to decide is if you will use standardized pricing for everyone, or customized pricing for the individual.

• Standardized Pricing

Standardized pricing is typically associated with B2C sales, though this is not a hard and fast rule. In this case, you have a published price that everyone is able to see. Typically, this would be self-service sales, or autonomous sales, where someone can buy your product without having an interaction with someone from your team.

In these cases, there are typically a large number of customers, and there is little customization of the product. There may be options for packages, but in general, the prices are set.

A prime example of this would be apps in the App Store, or online software one might purchase.

• Customized Pricing

This type of pricing is typically associated with, but not restricted to, enterprise sales, or B2B. These situations often involve much higher price points and the sale price is not published for public view.

An enterprise situation may have fewer customers, so sales typically happen in a person-to-person scenario, where a sales person or team closes a sale.

Finally, enterprise sales often involve a high level of customization of the product. Again, you may find examples of customized pricing in B2C scenarios as well, such as with car sales where there is a published price but many options for customization of the product, which results in a customized sales price.

Take out your Price Testing worksheet. You will see that there are two options here: one for Standardized Pricing, and one for Customized Pricing. Pick the one that makes the most sense for you.

Condition #1: Standardized Pricing

For standardized pricing, your main price optimization tool will be A/B Price Testing. As a reminder from the A/B pricing exercise, there are a few principles you need to follow in order for A/B testing work:

1. Statistical significance matters: Make sure you leave your experiment running long enough to reach significant results.
2. Not just for B2C: Enterprise sales can also be tested this way.
3. Avoid "multivariate testing": When you do these tests, do not change anything except the price!
4. No touching! Let the experiment run its course.
5. Run parallel, not serial: Run experiments side by side to avoid interfering variables like time and season.

Secrets to A/B Price Testing

In this section, you're going to learn some of the tricks that make Price Testing workable. For example:

• How to offer one price to one customer (A), and a different price to a different customer (B).
• How to charge anything before your product is available?
• What to do if someone finds out they paid a different price than the next person?

Let's start with...

How do you charge customers before you have a product to sell?

The answer is to combine price testing with your pre-orders. Take out your "How to Presell Anything" worksheet from the "How to Presell Anything" chapter.

Take a look at Step 4.

To A/B test your price, you're simply going to setup an experiment so that some people are able to pre-order your product at one price, and others are able to pre-order at a different price. It's as simple as that.

How do you not upset customers who are paying more?

Two things to consider when thinking about this question:

#1: Most people won't care that much.

This is because your first customers are Early Adopters. This group of people are less sensitive to price than your Early Majority or Late Majority. They've paid for what they feel a solution is worth. These are not bargain hunters.

#2: It's unlikely they will interact with each other or discuss the price.

If for some reason your customers do find out about the different prices, consider ensuring, in the end, that everyone gets the lowest price you tested on this first group of customers.

You can do this by ultimately charging everyone the lowest price you tested in your A/B test, no matter what each customer pledged to pay in their pre-order. You can do this because the data on your optimal price point is actually the most valuable "currency" you can get from this stage.

Your most valuable currency is the data that tells you your optimal price point, not the cash from the sales.

Another approach is simply to offer the lowest price to any person who actively expresses concern about the different prices.

Again, for the most part, this will not be as much of a problem as you might think. Your Early Adopters are much more interested in solving their problem than they are in finding the best price.

Step 1: Standardized Price

On your Price Testing worksheet, fill in the "Revenue/________" blank.

This may be revenue/user, /email subscriber, /customer, /visitor, etc. Use the metric that will help you maximize your overall revenue.

Note, this is a different metric than your conversion rate; it's more valuable. Ultimately, your conversion rate isn't nearly as important as your revenue per potential customer. Most of us would gladly cut our conversion rate in half, if we could quadruple our revenue per visitor.

Step 2: Standardized Price

On the X axis, you will put in your three prices from your Science of Pricing exercise. For my example, those three price points are: $49, $99, and $199.

Remember you are looking for the "quality hump", that place where you see pricing driving perception of quality, and that perception increasing your sales.

If your price is too low, your conversion rates may increase but your revenue will be low. Too high, and you may lower your conversion rates to the point that your overall revenue also tanks.

When I ran my experiment, I found that at $49, my revenue/visitor was $2.35. At $99, revenue/visitor was $6.17. At $199, the revenue/visitor was $3.39.

Here you can see a perfect representation of the quality hump: at a higher price point, I actually was able to generate more revenue per visitor to my website.

Condition #2: Customized Pricing

In this second scenario, you are going to try to adopt a "budget-based" pricing strategy.

Pricing will be driven by the customer's budget.

The goal is to optimize your currency while also providing the customer with the best solution they can afford.

Here, you have two ways to approach your budget-base price testing.

Approach 1: T-Shirt Pricing

In t-shirt pricing, you will be offering your customer a small, medium, and large offer. To do this, the first thing you will do is ask them:

"What's your budget?"

The logic here is that if you have no clue what they are looking to spend, you run the risk of wasting their time and yours.

For example, if you propose a $500 solution, but they are in a place to purchase a $5,000 solution, you will appear to be offering very little value/quality. The reverse could also be true. If they are expecting a $500 solution and you offer a $5,000 one, they'll immediately stop listening.

So before you start making an offer, you need to know: are they looking for a $500 solution? A $5,000 solution? A $500,000 solution? Etc.

This conversation may sound like this:

You: I would love to solve this problem for you. What's your budget?

Customer: Why do you need to know that?

You: I don't need your exact budget, but I want to avoid wasting your time by proposing a solution that it wildly outside your price range. Instead, I find it's easiest to collaborate on a solution if our restrictions, budget and otherwise, are clearly laid out in front of us. From there we can design an appropriate solution.

Once you know their budget, you can design three potential solutions for them:

1. A solution that is below their budget that offers almost everything they need to solve their problems. Helpful because it ensures you don't get undersold.
2. A solution that is at their budget to maximize their available spend.
3. A solution that is higher than their budget but offers additional value than they are requesting, so you can see if there's any wiggle room in the number they gave you.

These are your small, medium, and large solutions. You can propose each of them to your customers as a great way to start an open discussion about what will meet their needs, while maximizing your revenue.

Here's another secret:

The budget they give you will almost always be slightly lower than their actual budget. Don't be afraid to offer something above what they've said they can spend. If your "large" solution offer solves an important problem, they are likely to be able to find a way to pay for it.

On the worksheet, fill in your customer's estimated budget.

In my example, that number is $8,000. To calculate my "small" and "large" prices, I wrote in an offer for 75% of the budget, and then a high offer for 25% more than their budget.

In the "small" offer, you're setting yourself up to compete with anyone who is coming in with a low or budget price. Here you are sending the message to your customer that you are willing to compete at a low price point, but at that price you won't be able to provide all the value you're capable of.

At the full budget, or "medium" offer, you offer your full-product . In my example, I can offer a full day workshop and a number of free books.

In the "large" offer, you quote a number that is worthwhile to you, while providing additional value to your customer. In my case, that's providing some additional follow-up mentoring.

By understanding your customer's budgets and offering a variety of options, you can cover your bases by both competing with lower offers, but also providing higher-end options. Of course, the "medium" offer is a way of showing respect for their actual stated budget.

Approach 2: Limit Testing

What happens if you don't know their budget? There's a secret for that as well.

Limit Testing is similar to T-Shirt Pricing except that you are operating blind. In this case, you will make one offer, but it will involve both a core offer and a supplemental offer.

The core offer is what would be satisfying to you - both in terms of what you are offering and the currency you will receive in return.

In the space provided on the worksheet, write in a number that feels like it would be a "good get" for your team.

In my example, it would be $7,500 for a full day workshop and free books.

The supplemental offer is something you can add to your core offer to provide additional value that tests the upper limit of the customer's budget.

In my example, in addition to my core offer, I can add 3 months of mentoring for an addition $5,000. In other words, my initial offer is $12,500 for a supped up package, but I have something that I can easily take away (my supplemental offer) and still know I am providing a high level of value.

This way, if their budget is much lower than the full price I quote, I can easily accommodate my customers by removing the "supplemental" portion of my offer.

In this combined offering, it can feel scary because your initial offer will very likely exceed their actual budget. In fact...

Limit testing is designed to exceed your customer's budget.

...so you can figure out what their budget is. Once you discover the budget limitations, you can have an open conversation about funding the project and how to meet both their needs and yours.

Secret to Limit Testing

The reason this works is because you have already done the work to understand their problem. If you are truly solving their problem, enterprises will not walk away over money.

If you can solve their problem, money will not be an immediate deal breaker.

Unlike with consumers, enterprise customers aren't likely to turn their back on you if you quote them a price higher than their budget. They're much more likely to come back to you and simply say, "we'd love to work with you, but we can't afford that price. Our budget is ____".

As soon as they offer their budget, you can modify your offer by falling back into T-Shirt Pricing mode.

Limit Testing also prevents you from underestimating a customer's budget. Offering a price that includes a "supplemental" component helps ensure you're not leaving extra money on the table, if in fact you're underestimating your customer's budget.

Once you've entered into a handful of customized pricing conversations, you'll find that there is a pattern to your offers and your customers' budgets. From that point you may be able to standardize your price and make a more efficient sales cycle.

What's Next

This exercise has been all about how to test your price. You now have a full understanding of both standardized and customized price testing and you know:

• How to test your way to your optimal price point
• How to run price tests without pissing off your customers
• Two ways to negotiate price with enterprise customers

Next you will discover when you're done currency testing!