Pricing Your Products and Services w/Dr. Fialho

by Joshua Botello

One of the hardest things about starting a new business is: How do you price your products? Today my guest will answer that question. Dr. Frank Steven Fialho is a Marketing professor at the University of La Verne College of Business and Public management. Let’s get into the interview. 

How Important Is It For a Business to Get The Pricing Right?

Dr. Fialho: Most people look at marketing as promotion and sales. Very few people understand that marketing is tied to the product, price, and distribution (Place). Price is so important. I am also wanting to price before a product because it’s so important. You need to decide on the price, it’s a huge piece of the 4 Ps. It comes from a lot of market research that you have to do for your product, so it’s very critical. When you said you wanted to talk about price, I could see how businesses struggle with Price. There’s no doubt in my mind. Our students in the Integrated Business Program, I tell them when they startup “Once you get done with the product and write the business plan, you will deal mostly with price for the rest of the time.”

What Factors Go Into Pricing Your Products and Services? 

Dr. Fialho: The marketer needs to understand the difficulty in pricing is that they look at the product and want to price the product. We have a product and finance will say, “this is our cost, and this is our markup. This is where we are going to place it in the marketplace.” And that’s all good if you are coming from that particular point of view. But as a marketer, I have to understand a couple of things and it comes from market research to understand your product. How much does your customer look at your product and weigh in the value of it? The perceived value of that product? 

Now when I teach my marketing classes, I remove the “Price” and I insert the word “Pain”. OK? When we pay for something, It’s painful. Neuroscience will show you that the same part of the brain “lights up” when we give money away as if we were to receive physical pain. So how much pain is your product going to alleviate for the customer? That will give you a pretty good idea of where you can price it. If it’s a lot of pain that it’s covering, then you can charge more money for it! If it’s not a lot of pain, then you are probably going to be in a competitive marketplace. In that sense, you need to understand where your anchor pricing is. Where that anchor is where we are going to base the price on. 

Let me give you an example: If I was to ask what is the average price of a hamburger or cheeseburger, it’s probably $5 or $6. That’s an anchor. So if I said “I have a real good cheeseburger and it’s $10”, you would probably say “It better be a damn good cheeseburger!” Because I’m going to give up 10 dollars of pain and it better be so good that it dissolves that pain. But if I said this cheeseburger is a dollar, you would probably say “ I don’t think I want to eat that burger.” A dollar is just not enough. Understanding, the perceived value that a customer has is a start. So, I tell my students “Ask your friends about products. How big is this problem?” You will see if you join us for the Integrated Business Program and the bank presentation, I will ask my students for all your product “How big is this pain?” It needs to be big if you want a big price you better hammer out a good-sized pain. 

I look at value as the perceived value. If you buy an Apple computer, the perceived value of an Apple computer is very high. I could look at a Costco ad that will feature an Apple, Dell, and HP computer all on the same page and that Apple computer is (priced) considerably higher than the other ones. Like $500 more! When you see the attributes or features of it, Apple doesn’t really have the best-featured computer. The other ones do. So what’s up?! It’s that perceived value. People perceive the value of an Apple computer, way above an HP. I don’t know if you have an HP but is almost perceived as a disposable product. An Apple computer will be will someone for the rest of their lives, practically, and they don’t want to get rid of it. Just ask someone who owns an Apple product as I do in my class, “If you have an iPhone, do you still have the box it came in at home?” They say Yes. Why?! Because it’s that perceived value I weigh so much on. So understanding the perceived value to the customer and how much pain you wipe out, that’s a starting point for where I can price.

How Do You Go About Evaluating Your Pricing as a Small Business? 

Dr. Fialho: It’s pretty simple. You actually go to your accounting department and if sales are increasing, then it’s probably a good price. If it’s not selling, there’s probably a reason why it’s not selling and it may not be price. I teach a 16-week marketing class and there are all kinds of components that could weigh into that. Remember, the perception of that product could be wrong. The brain is trying to make a balancing act against what I’m paying for and what it costs. 

If you want to pin it entirely on price and sales are not coming in because someone says “your price is too high.” May it’s the way you framed it. Maybe it’s the way you positioned it. Maybe it’s the way you told someone about your product that could change pricing. That’s one variable that you aren’t selling. The other variable is maybe I’m selling too quickly. Maybe I’m leaving money on the table. Maybe I erred on that side. 

There are times in the IBC program where students will learn about price in real-time. They will go to an event and take products out there and say “We are selling this stuff WAY too fast.” And they will up the price and then up the price AGAIN. I’ll say, “You see how you might have missed the price because of the venue you were going to?”

In market research, our students will send out a survey with the product and price and ask you “is this a price that seems logical to you to buy?” Then there is an actual act of testing it in the market and you are testing it as soon as you can see it. Is it moving the product or is it not moving the product? I will tell you it’s ONE variable. There could be a ton of things that could be going wrong and most people want to blame it on price. Maybe the price is not the problem. May your customer service is the problem. Maybe your crappy hamburgers are the problem, but you are going to blame it on price. 

How Would a Small Business Go About Raising Their Prices?

Dr. Fialho: Raising prices is different than starting high then coming down. It’s always easier to start high than come down because now when I raise them, the brain is already Let’s say you have a cheeseburger and I want to raise the price. You never see In-n-Out raise their cheeseburger price substantially. They will take their In-n-out cheeseburger price and raise it incrementally. Small numbers. It’s called the “Just noticeable difference”. I want to raise it just enough not to make it noticeable when it’s in range. Don’t Just make a leap unless you are Disneyland and you can charge hundreds of dollars more for an annual pass, that’s not incremental but that’s Disneyland. 

How Would a Small Business Communicate That Raise in Prices to their Customers?

Dr. Fialho: If it’s just under the “just noticeable difference”, then I wouldn’t even worry about it. I wouldn’t raise a flag. When it’s dramatic, then I might have to come back in and tell you why. And you will probably get pushback. 

2 to 3 years ago I used it as a case study in my class: Reed Hastings of Netflix decided to raise the price. They were getting rid of one stream and raise the price of another. They were going to separate DVDs from online streaming and they are going to create this stuff (new shows) and raise prices. They lost so many customers because of that poor “not thinking of the decision”. 

Then he had to circle back around and say “whoah, whoah. We aren’t changing it now. We’re keeping it the same way.” If they would have just slowly taken that away and not make a big deal out of it. They made it so you had to choose and the brain thought, “I’m getting robbed! I don’t like this.” Raising a flag to it draws attention to it unless you are going to raise it hard. Disneyland doesn’t care, they will throw the price of an annual pass from $429 to $699 in one year and never even told anybody until people looked at it. When people looked at it they say “oh well that’s the price. That’s what you have to pay. It’s Disneyland.”

What is Your Advice For Small Businesses?

I would say small businesses probably lack in the element of this and I have done small business chamber of commerce workshops. They spend so much time on the other elements of marketing and forget how important price is. That’s why you will get them circling back around saying “we have a problem with price because we didn’t start thinking about price until we’re not selling.” At that point, it’s almost too late. You need to think about the price through the whole deal, from beginning to the end. If you think about it, in our IBC Program, we start with the product and within the second week of that program, I am teaching about price. That’s how important it is. 

Think about a small business, when do we really get into that? We’re into operations, we’re hiring people, we’re bringing in stuff, and they don’t really focus early enough in marketing. Focus on the price early in the marketing process. Don’t save it for last. Start really thinking, talking, and asking questions. You can’t ask enough questions. Peter Drucker says “We never go wrong getting the right answers. We always go wrong because we don’t ask the right questions.” We’re not asking the right questions and that is when we go wrong. 

Special thanks to Dr. Fialho for his insight on marketing and pricing and for his help with this article. Let me know what you think. Have you priced your products before? Do you have any tips of your own? Let me know down in the comments below.

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.