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SXSW Chat: Startup Pricing Suggestions – Reduce And Raise
At the South by Southwest Conference, I spoke with an entrepreneur who suggested that the best thing you could do to find new clientele is to lessen the pricing options and increase the price. Sounds counter-intuitive, but it works. I find it entertaining how new entrepreneurs are attracted to the idea of price cuts. It’s bad for the entrepreneur, it’s bad for service quality, and in the end, it’s bad for the customer. Instead, concentrate on attracting clients who are willing to pay top dollar for premium service. This works for companies that sell products, services, or both. My favorite examples are web hosting provider Rackspace.com and the Mercedes car company. Here are some reasons why:
1) While people claim to enjoy having options, it actually complicates their decision making process. In The Long Tail by Chris Anderson, the author suggests that offering fewer options gives them less to be unhappy about. For example, an ice cream shop with two flavors will make more money than if it had fifty flavors because consumers have less to deliberate about. Less is more.
2) Price point always determines the type of clientele you’ll attract. Most people share the idea that you get what you pay for. In most cases, this is very much true. If we look at Rackspace.com, for example, they were charging me $400/month on a box that I could have purchased at Managed.com for only $69 a month. By paying more, I felt as if my website hosting was in better hands. And it was. The extra money I paid was reinvested by Rackspace into building higher quality infrastructure.
If we look at the example of Mercedes, you’ll see that the company attracts top notch clientele who can actually afford the company’s vehicles. Sure, these customers expect higher quality service, but they may often be easier to deal with. When you talk to "budget" consumers, they’re solely interested in the nitty grittty. They’re mostly interested in getting the lowest price possible and forget about the actual product/service. Are these customers you want to dedicate your time dealing with? If you satisfy the rich and famous clients, they’ll connect you with the world. The wealthy are very well connected and will help do the marketing for you.
3) Lastly, charging more money gives you more cash to play with. When you’re growing a company, you want to dedicate your time to producing a high quality product that doesn’t break. That way, you’ll spend less time and money fixing problems and refunding customers. Popular marketing expert Seth Godin makes a huge emphasis on spending your marketing dollars on creating a top notch product. While it’s difficult to do in practice, it makes sense. Again, the rich and famous have lots of connections, so they’ll help do the marketing for you.
So the next time you start a company that sells something, think about how to target the high rollers. Cut out the budget shoppers by increasing your pricing. You’ll make more money and be able to dedicate your time to creating an amazing product.
Jessica Mah is a 17 year old entrepreneur, blogger, and sophomore in college. She’s currently the founder of a startup, managing editor at Startupism.com, and Jessicamah.com. In her free time, she enjoys the prospect of being an underage angel investor while partying like a rock star. (and traveling to random cities and checking into hotels while being underage)