The 1% Windfall summary

How do you determine your product’s price? If profit is your priority, the best way to do this is through value pricing.

Value pricing uses the customer’s next-best alternative as a base price and adds or subtracts cost, depending on the product’s attributes. There are two ways to calculate this: one-on-one pricing and multi-customer pricing.

Which pricing strategy should you use, and when?

To set a one-on-one price, first identify your target customer. Then identify your customer’s next-best alternative product, and the difference between your product and the other product. Based on this calculation, you can then determine your product’s value.

One-on-one pricing is your best option when a product or service is sold to a single customer, such as selling a home. One-on-one pricing is also the most viable option when pricing a new product.  

Say that you and your neighbor are renting your homes. The only difference between the two homes is that your house has a pool. In this situation, there are three possible outcomes:

In the first outcome, the rental price your neighbor has set, $1,000, is reasonable. You know that people are willing to pay 20 percent more for a pool, so you then set your price at $1,200.  

In the second outcome, your neighbor’s rental price, $2,000, is too high. But you can’t charge above a reasonable market price just because competitors are doing so. Knowing that a reasonable price is $1,000, you add the value of the pool to come up with a price of $1,200.

In the third outcome, your neighbor has set a too-low rental price: $500. You’ll have to accept this low price as a base. But since people can rent your house at such a discount, they’ll be willing to pay more for a pool, say 30 percent more. With this calculation, your price is then $650.

Our next step is understanding how to sell to many customers: Read on for more!