Page 157 - The $100 Startup_ Reinvent the Way You Make a Living, Do What You Love

Principle 2: Offer a (Limited) Range of Prices
Choosing an initial price for your service that is based on the benefit provided to
customers is the most important principle to ensure profitability. But to create
optimum profitability or at least to build more cushion into your business model,
you’ll next want to present more than one price for your offer. This practice
typically makes a huge difference to the bottom line, because it allows you to
increase income without increasing your customer base.

Look at Apple, which famously produces very few products and doesn’t
bother to compete on price. Even though there are few products, there is always
a range of prices and options. You can buy the latest iGadget or computer at the
entry level (which, knowing Apple, isn’t cheap), one or more midlevels, or one
“superuser” high-end level. The leadership team at Apple—and anyone using a
similar model—knows that this kind of pricing allows the company to earn much
more money than it otherwise would. This is the case partly because some
people will always choose the biggest and best, even if the biggest and best is
much more expensive than the regular version. These kinds of sales will increase
the overall selling price.

Also, having a high-end version creates an “anchor price.” When we see a
superhigh price, we tend to consider the lower price as much more
reasonable … thus creating a fair bargain in our minds. The internal thinking
goes like this: “Wow, $2 million for the latest MacBook is a lot, but hey, the
$240,000 model is almost as good.”

Let’s look at an example of two pricing options: one offered at a set price and
one on a tiered structure. Keep in mind that you can substitute any prices here to
apply this to another business.

Option 1: The World’s Greatest Widget
Price: $87

Option 1 is simple and presents the choice as follows: Do you want to buy this
widget or not?

Here’s an alternative that is almost always better:

Option 2: The World’s Greatest Widget
Choose Your Preferred Widget Option Below
1. Greatest Widget Ever, Budget Version. Price: $87
2. Greatest Widget Ever, Even Better Version. Price: $129
3. Greatest Widget Ever, Exclusive Premium Version. Price: $199