One of the most common mistakes tech entrepreneurs (especially first-time ones) make is to charge too little. I believe this mistake has two explanations.
To start with, most people feel uncomfortable asking for money. We are not brought up to ask for money and in many cultures it's actually considered quite rude.
The second reason is that, whereas offline we have solid benchmarks to price things (everyone knows how much an ice-cream or a mug cost), online we are often left to our gut instinct. What is the cost of an invoice software? A software bug-tracker? These industries are so young and change so quickly that we simply don't have universal yardsticks.
My only advice for the first problem is to turn the uncomfortable into the comfortable by means of repetition. Ask people to pay for things you do until it comes naturally to you. This is one of the most important skills you need to develop if you want to be an entrepreneur.
For the second problem, I can tell you a story.
In his famous book "Influence", Robert Cialdini tells the story of an Indian jewellery store that can't sell a collection of turquoise jewellery despite it being peak tourist season. One day the woman in charge of the shop, frustrated and exasperated, writes a note to her head of sales "Everything in this display, price X ½ ". When she returned to the shop, she wasn't surprised that the jewellery has been sold. However, she was amazed to discover that, because the employee had read "½" in her message as "2", the entire collection had sold out at twice the original price.
What had happened here?
The customers, mostly well-to-do vacationers with little knowledge of turquoise, were using a standard principle — a stereotype — to guide their buying: “expensive = good.
In other words, the vacationers, who lack the specific knowledge about turquoise jewellery, took a mental shortcut and relied on the feature of cost to determine the jewellery's quality. Price alone had become a trigger feature: by simply increasing the price, the perceived value of the product was increased as well.
It's easy to fault the tourists for their foolish decision. However, their behaviour can be explained very easily:
- Most of us have been brought up on the rule "You get what you pay for", which before long translates into "expensive = good". Since the "expensive = good" stereotype works well for us most of the time (a higher price typically reflects higher quality), we subconsciously use it automatically.
- We might scoff at these vacationers for paying twice as much for something they could have gotten the day before for half the price. Yet, you assume they knew it. An important feature of any business is information asymmetry.
- Stacking the odds by judging each feature one by one to see if the jewellery was actually of high quality is mentally challenging. Most people (that includes me and you) are lazy and prefer to take mental shortcuts. In this example, the vacations used the mental shortcut that has served them well so far - that one that says that higher price = higher quality.
- Unless you work in a specific industry you probably lack specific knowledge about the real cost of many items. Hence I don't know what the real cost of a turquoise necklace is but I trust more a $20 necklace than a $5 one, even if I know nothing about jewellery.
This story is interesting because in the beginning we all wonder what must have happened to sell the jewellery and when the twist is revealed, we react with a laugh but in truth, we are not really surprised. Deep inside ourselves, we know this to be true: how many times have we bought something because the price communicated quality?
How can we use the lessons learned from this example to charge more for our products?
- Use price as a selling feature. People won't probably evaluate every single feature of your product but will use mental shortcuts. The most common mental shortcut is "higher price = higher quality".
- Use information asymmetry. The same problem you have when deciding how much to charge for your product is the one your customers face when deciding how much to pay for it: lack of standard benchmarks. You can use this to your advantage by pricing your product in a way that communicates quality.
- The "right" price is often the one that makes us uncomfortable. As a rule of thumb, I always price my products 2X or 3X what I'm "comfortable" charging for. Then I force myself to sell at that price point.
A word of caution. After reading this post you might be under the impression that you simply need to charge more and flock of people will buy your product or everyone will think yours is the best product in its category.
However, it doesn't work that way.
Using pricing to communicate high value works only if your product ACTUALLY has high value. The risk is to create cognitive dissonance by communicating one thing (e.g: high quality) and offering another (e.g: low quality). While it is true that the majority of tech entrepreneurs could (and should!) increase the price of their products, don't see this as a silver bullet or something that you can use to "cheat" people.
People might use mental shortcuts when assessing the quality of a product, but if your product doesn't live up to what it promises, people will notice pretty quickly.