A good friend of mine recently told me that his wife had started selling handmade mittens online. He showed me the items and I was amazed at the quality. “How long does it take her to make a pair of these?” I asked. He replied that she spent about 5 hours on them and was selling them for $10 each.
For five hours work.
I was amazed; he explained that since she was home with kids it gave her something to do and that she was content with the extra spending money it earned her.
In today’s world of eBay and Etsy it’s easier than ever to sell something online. The hard part is determining how much to sell an item for.
For my friend’s wife she was pricing her item at what she would be willing to pay for a pair of mittens. More often than not, this is a terrible way to price an item.
There are millions of people online each with different incomes and different expectations. The range of what a person may pay for an item is based on so many complex variables that there have been literally dozens of studies done on the psychology involved in the practice of what consumers will pay for a product.
I recently overheard a discussion where a good friend of mine was explaining that a particular product was of very high quality because it was priced so high. His comment led me to reflect on a point that an accounting professor once pounded on his desk to emphasize.
“ALWAYS SET YOUR PRICE HIGH!” he shouted at us.
His reasoning? You can easily lower your price, but once you set a price it’s forever valued by consumers at that price point. This makes it extremely difficult to raise prices as evidenced by the loss of almost a million angry customers experienced when Netflix attempted to increase prices. (Read the Huffington Post article).
I like to think of his advice as being the Costco Hotdog model. Costco has kept its famous hotdog and soda combo priced at $1.50 for the last 28 years.
When it comes to growing a business, setting a proper price point is incredibly important. Set your price too low and you’re missing out on a large amount of profit. Set it too high and you won’t be in business long. Use early sales to help determine if you’re at the right price point.
I shared with my friend’s wife an experiment. While shopping on eBay for a wireless network card I stumbled upon an auction of a gross of them for a few dollars more than what I had been willing to pay for a single card. Now I’m guessing that folks these days aren’t too familiar with the term gross which means 144, and that the seller didn’t realize just how much those cards were worth because that auction quickly closed with me purchasing it at that low price point. I then listed a single card at what I thought was a very high price. It didn’t sell. I then lowered it a bit and it sold. I now had a price point and sold the rest of the cards in that range knowing what people were willing to pay for the card.
My advice was simple. When setting a price, if an item is selling too fast, charge more. If it sells too slowly, charge less.
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