Your offer might not be converting because of incorrect pricing.

Here’s how to pick the right price and why it’s crucial to your business’s success.

Price to Value Discrepancy

The key to successful pricing is understanding the price to value discrepancy.

People buy products or services when they believe the value they receive exceeds the price they pay.

As long as this discrepancy exists—where value is above the price—customers will continue to buy from you.

However, when value dips below (or matches) the price, customers stop buying.

Most businesses struggle because their products are only marginally better than average, putting them in a tough spot where they can’t secure repeat customers.

To thrive, your product or service must be exceptional.

Reality Check

Most businesses think they're really good at what they do, and that they just have a problem getting leads or selling.

Where in reality they just aren't that good.

They're average.

They're mediocre at best.

And when you aren't absolutely great, that puts your value below the price you're trying to sell your products and services.

You need to be exceptional. You need to be remarkable.

You need to be so good that people talk about you.

And that's difficult to do.

That's why most businesses don't make money.

Understanding how much value you need to provide is going to be key to making sure that your pricing works.

Improving the Discrepancy

There are two ways to improve the price to value discrepancy:

  1. Lower the Price: This is a one-way ticket to failure, so don't do this.
  2. Increase the Value: This is the preferred method. By increasing the perceived value of your product or service, you can charge higher rates.

When you lower your price, you can only go down to $0.

But you can go infinitely high when you increase your value.

Remember - your goal is to sell massive value at a discount.

You're selling dollars at a discount.

The Vicious Cycle of Pricing

Most businesses look at their competitors and price their products slightly lower to remain competitive.

This leads to a vicious cycle where they continuously offer more for less until there’s no profit margin left.

And that's why most businesses are broke.

When you decrease the price it:

  • Decreases:
    • Perceived value
    • Customer emotional investment
    • Results
    • Revenue per customer
  • Increases:
    • Client demands (those that pay the least are the biggest pain to deal with)

The Virtuous Cycle of Pricing

Instead, adopt a virtuous cycle of pricing:

When you increase the price it:

  • Increases:
    • Perceived value
    • Customer emotional investment
    • Results
    • Revenue per customer
  • Decreases:
    • Client demands (because they pay more, it allows you to reinvest in your business, improving service levels.)

If a product is priced higher, customers often believe it’s of higher quality.

This principle can be seen in a Stanford study where tasters rated the same wine higher when it was labeled with a higher price.

Why You Should Charge What It’s Worth

Pricing itself communicates value.

If you underprice your product, customers might perceive it as low quality.

But, higher prices can signify higher quality.

For instance, Warren Buffett’s success with See’s Candies involved raising prices annually, which increased perceived quality and profitability.

Creating a Category of One

To stand out, price your product so high that customers must pause and think it cannot be the same as other solutions.

Higher prices attract better quality prospects, which in turn improves your product quality because you can afford to provide a better experience and achieve better outcomes for your clients.

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