MarketMe 2.0

Even then, when people are actually forking over their hard earned cash for your product, you still don’t know if you’ve optimized for the best possible price to generate the greatest number of sales.

Fortunately there are some simple strategies you can employ to quickly arrive at a happy medium and give yourself a little piece of mind.

The Binary Nature of Pricing

The first pass you’ll want to take at pricing is to eliminate all of the people that weren’t going to pay you to begin with.

What may shock you is that when it comes to a consumer’s perception of pricing, it’s not always the actual amount that scares people; it’s whether or not they have to pay at all. Pricing is more or less binary for consumers – they are either going to pay or they won’t – the actual price is incidental.

Having launched ten companies myself, all in different industries ranging from automotive to financial services to television casting, I’ve found that in each case you get a group of consumers that are willing to pay just about any reasonable price for the product, and a group of consumers that won’t ever pay a penny.

There’s something that goes off in a customer’s head when they have to pull out their wallet. Up until that point the value you were providing may have gone relatively un-noticed. But when the customer has to break out their credit card and start typing in those 16 magical numbers, they think twice about the value of your product.

Instead of developing your pricing to lure the group of people that just aren’t willing to pay for your product, focus on maximizing the yield of the customer who will pay for your product. It’s a lot easier to get someone to pay 10% more for your product than it is to reduce the price of your product and get more people to pay for it.

The “Freemium” Model

Next you’ll want to figure out how to separate the paying customers from the non-paying customers, without alienating either.

Leave it to the overzealous Internet nerds like me to invent a word like “Freemium” to explain a basic price gateway model. Freemium is a word used to describe giving a portion of your product away for free in order to attract interest, then charging the most passionate customers for premium benefits.

I’m not entirely sure, but I think this model was pioneered by Baskin Robbins every time they handed me a free sample of chocolate ice cream in order to convince me to buy an entire cone. These days the freemium model appears when I want to sample a song on iTunes but have to pay to download the whole song onto my iPod.

The beauty of the freemium model is that allows you to test two pricing strategies simultaneously. You get to see how many customers would be interested in your product for nothing at all to gauge the overall interest in your product. It then allows you to learn exactly what about your product people are most interested in paying money for.

Try every Possible Price

Once you’ve separated the paying customers from the non-paying customers, you still need to settle on the right price to charge them. There’s one simple answer here: try every possible price.

I’ll give you an example. At Swapalease.com, a site that allows people who want to get out of a car lease to connect with people who wanted to get into a car lease, we charged people to post their car leases on-line. The problem was, we didn’t know how much to charge them, so we tried every possible price.

Our early estimates figured we would probably get around $24.95 per posting on the site. We constantly tried new pricing strategies to figure out what would be the right price that consumers would accept.

Wouldn’t you know that after six months of testing we found out the number was over $100 per post!

The only thing that kept us from simply making four times as much per sale was our willingness to test the sensitivity of price. Had we gone with our gut instincts we would have vastly undervalued the product and left a whole lot of money on the table.

It Pays to Try Everything

The only thing you can rely on when picking the price of your product is having to change it – a lot.

If you can develop a system to test as many possible price points with as many consumers as possible, you can hopefully uncover that hidden gem that is your perfect price. Until then, keep trying something new. It’s the only surefire way to win.

The truth is, it’s not the multi millions that will change your life forever – it’s the first million (or less) than really makes the difference.

You see, most of our lives are spent trying to get ahead in this world financially. We all seem to make just a bit more than we spend, and we save those extra pennies to buy the things that we want. So in the event that we can get a big check in our hands that can finally get us ahead of the game, it’s a very big deal, even if it’s not a very big check.

It’s not about Retirement

Don’t think about cashing out in terms of having enough money to retire on. Heck, don’t even think about retirement. Retirement used to mean more when the average person had to toil in the fields or work in a mine shaft. These days the biggest physical hazard of your job is that you’ll get carpal tunnel syndrome.

Cashing out isn’t about never having to earn money ever again, it’s about earning enough money that you’re not worried about money ever again. There’s a very significant difference.

It’s nearly impossible to survive without some form of active income in your life, so it’s safe to assume that no matter how much money you save, you’ll always have to deal with earning more money to stay afloat. Cashing out rarely fixes that problem eternally.

Not worrying about money simply means that you have enough in reserves to address a financial crisis should it arrive. Knowing that you can survive a downturn is really what financial security is all about.

A Million buys most of your stuff

Think about what a million dollars buys you in this country - it’s quite a bit. We spend the first couple of decades of our working life struggling to pay for the basics – a house, a car, our education, and some furniture. At some point in our lives, usually when we’re closer to retirement, we get ahead of the curve and pay for all that stuff. Only then can we start saving some serious money or giving it away.

Yet if you could be so fortunate as to be able to pay for all of that stuff all at once, without having to spend the next 20 years saving for it, you’d be way ahead of the game. You could spend your discretionary income on things like taking long vacations and giving to charity – a luxury most young people never truly enjoy.

Reducing Debt is all that Matters

If a lump sum of cash can do one thing that will truly change your life, it’s reducing your debt. The average American lives in a constant cycle of earning their way through each month to pay off their bills. The most responsible of us may even save enough money to get pay down some of their debt. The rest of us will be servicing mortgages and car payments for a really long time.

Changing this equation – paying off all of your debt – changes your life considerably. When you’re not struggling to service debt, your options change.

Would you really be doing this job if you didn’t have certain bills to pay? What would you do if your expenses were next to nothing? What chances could you afford to take?

Reducing your debt gives you an amazing amount of leverage in your life. For the first time you can actually afford to say “no” to the things you don’t want to do. Very few people ever have that luxury because in the end, we’ve all got bills to pay.

If the Money is on the Table, Take it!

Every person in a company struggles with the “right amount” to cash out with. The founders, the employee stock holders and certainly the investors. But thinking about the deal in terms of the maximum amount of cash you can pull out isn’t necessarily the best approach.

Instead, think about the deal in terms of whether or not it may go away. There is a long line of forgotten entrepreneurs who wish they would have taken the money – in any amount – when they had the chance. There’s a very short line of entrepreneurs who actually pulled the trigger, cashed out, and never thought about it again.

That’s because once you’ve cashed out, no matter how incredible the sum, you’ve created the opportunity to significantly improve your financial means in this life. If that opportunity comes your way, no matter what the price, take it.