Three humps and a stick (on pricing)

I’ve been working on a video project and thinking about pricing. That led me to this chart, which is more conceptual than accurate.


Let’s go through it, starting with the stick on the left.

FREE stuff spreads. You don’t make any money from the thing you’re giving away, but you do get attention, which is worth as much, or more in many cases.

Charge even a penny, though, and the drop off is huge.

Jump over to the middle hump, the one without the question mark.

REASONABLE PRICING puts you right in the middle of the market. With reasonable pricing, you can move just a bit to the left or the right to find the sweet spot, the spot where you can balance money for promotion or shelf space or advertising against keeping your price low. Most of us are familiar with the shape of this curve in our industry. For example, hardcover books go for about $21. At $28, you have more money for co-op and ads, but sales go down a bit. At $19, you can’t promote much, but sales go up a bit.

Move a bit to the left to the first hump with a question mark.

REALLY LOW PRICING is a whole new world. That’s when something becomes cheap enough to be irresistible to someone who might not consider the category at all. This is what happens when MP3 songs go from 99 cents to 20 cents. This is what happens when you sell a hardcover book for $10. There’s no room for big promotion, at least at first, but as WalMart has shown us, you can get scale at the super low end and have plenty of profit left over to hire fancy PR firms and lobbyists and ad agencies.

The last hump, the one on the right, is usually unexplored.

REALLY HIGH PRICING is the domain of specialty markets and superstars. Elton John gets $300,000 to do a bar mitzvah. John Cleese offers training videos that cost $1000 for one DVD. This is the land of high service and extreme exclusivity.

What’s interesting about the four choices is that most organizations are only familiar with one. Ask them to try another and they freak out. They don’t even want to consider it.

I think real growth can come when you get out of your comfort hump and create a blend. Understanding how to live in multiple worlds and to balance them isn’t obvious, but the opportunities are worth it. Ben Zander’s brilliant book costs $10.20 at Amazon in hardcover.  Buying the DVD costs $1495.00.

If he wanted to sell the DVD in large quantities, he’d need to price it differently and sell it in a different channel. But if he wants to work with trainers and the distributors who sell to them, he’s exactly in the center of that third hump.

Careful about the Y axis (volume). Units aren’t always the goal. (that’s why I said this chart was conceptual). FREE gets you the most units, REALLY EXPENSIVE the least. But depending on your objectives, units might not be the point.

It’s not important to know the right answer, which hump to choose, because there isn’t one. It”s essential to know the question, because there are four distinct choices, and not choosing is still choosing.