The high-end market can be intimidating. Many entrepreneurs are hesitant to sell expensive products or services for fear that people won’t buy. Besides that, we often assume that a product that costs a lot to purchase cost a lot to produce. That means bigger, riskier overhead. But is the fear of pricing customers out justified? Is a product’s price determined exclusively by its production costs? What if there’s a way around these supposed obstacles? What if the rewards are well worth navigating them?
The truth is that high price tags can be a huge boon to businesses, even small ones. While the extra digits may result in fewer customers, they can also mean greater revenue and lower operating costs. And while many products’ hefty prices are necessitated by high production costs, that’s not always the case.
The key is to be sure that the higher price reflects one thing and one thing only: the product’s value. Not its production costs, not its prestige, not even your own revenue goals, but its value to the customer. Is it worth it to the customer? If the answer to that question is yes, no price is too high. And a high-price business model has advantages that mass sales lack.
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Reason 1: Customers retroactively value expensive purchases.
Meaning once they’ve spent all that money, they’re gonna love the product if only for that reason. The customer has invested hard-earned money into the purchase, which essentially means they’ve invested their most valuable resource: time. Look at high-end cars. They’re never dirty or neglected. They’re immaculately clean. They’re parked far away from other cars in a given lot. The maintenance schedule is followed to a T. Their perceived value is almost a self-fulfilling prophecy.
Warby Parker provides a more specific example. Their stylish glasses are inexpensive to produce and were originally sold at bargain prices by market standards. Eventually, though, it became clear that the low price tag was actually keeping away the fashion-minded customers the company wanted! Their solution? Charge twice as much, and donate a pair for every pair purchased. Customer perception was realigned, sales went through the roof, and disadvantaged people got glasses they couldn’t otherwise afford. Everyone wins.
For an even more extreme bit of proof, look no further than medical trials. Patients given placebos in clinical studies were divided into two groups. One was given a placebo they were told was a cheap, generic drug. The other was given an equally useless placebo and told it was expensive. Guess which group felt better, despite neither group actually being treated? No greater proof of the power of price perception could be asked for.
Reason 2: The business doesn’t need as many customers.
We all know the difference between quality and quantity. Generally, businesses seek to attract the greatest number of customers, hoping their product appeals to as broad an audience as possible. But it’s just as valid to seek affluent customers and maintain high-profit margins. Each of these high-paying customers can bring in as much as any 3, 5, or 10 mid-to-low price customers. If the product is right, concierge math works out.
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The high-end game also has another advantage: overhead can actually be reduced, or at least kept to a smaller percentage of revenue. Having fewer customers means having fewer customers to serve. All of the manpower, tech, shipping and other support resources you would normally have to employ can be reduced. Keeping 100 people happy is far easier (and less expensive) task than keeping 1,000 people happy. Your budget will reflect that.
Reason 3: It filters customers.
When the investment is big, not everyone can or will agree to it. That can mean more serious, committed, and generally more wealthy customers. While it can be argued that the wealthy may value products less because their affluence allows them to blow cash with few regrets, there’s another side to the coin. Someone who doesn’t have to worry about the cost of a product can then focus on the only thing that matters: quality.
Those with enough money to spend on high-priced items are more likely to base their decisions on quality rather than seeking the best bargain. This kind of customer never has to be convinced that the price is right, only that the product is. If it meets their needs, they’ll spend whatever it costs, because they can. In the end, you can spend freely on product development and production, because the customer can support you. It ultimately means less focus on salesmanship and more focus on the product itself, simplifying your mission.
Reason 4: Customers use the product more.
Having invested so much into the product, high-end customers tend to be quick and eager boarders. They become invested because of the investment, truly engaging with what they’ve bought and the company that made it. This is particularly true for service and software businesses, where the actual use of the product is key to maintaining customer loyalty. In this case, the high price gives you the opportunity to create lifelong customers, because the customer doesn’t want to have wasted their dough.
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Reason 5: Profit margins can grow if costs stay the same.
While high prices often reflect high production costs, that’s not always the case. Especially in online businesses, costs can stay within a fixed or narrow range. This means that every increase in price— rather than following an increase in overhead— simply means more money going to the business. The risk remains reasonable, but the rewards become substantial.
Reason 6: It motivates you to create the best possible product.
Just as having spent a lot of money makes a customer more devoted, having charged a lot for it can have a similar effect on you. In order to be worthy of your customers’ hard-earned cash, you may find yourself pushed beyond the usual limits of your creativity. The struggle to make something uniquely valuable creates innovators and thought leaders, and that’s often driven by the willingness of customers to pay a premium for it. Apple products, for example, are drastically more expensive than every other product in their industry. That expense goes hand in hand with their universally acknowledged commitment to pushing the envelope.
Reason 7: It creates devoted followers
Once customers are engaged and invested in what you do, it breeds extreme brand loyalty. As time goes on, they’ll want whatever you sell simply because they’ve invested not in one product or two, but in an ongoing relationship. This allows you to experiment, branch out, and potentially diversify. Once your brand has become synonymous with a certain level of worth, your customers will be willing to trust your instincts. That means you can follow those instincts knowing that your customer base will support you.
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The high-end game is worth considering. Don’t be afraid to charge what your product is worth simply because you fear a backlash. Offering low-to-mid-priced products as value options for the mass market is a perfectly good strategy, but so is offering expensive goods for those willing and able to invest in them. It’s not about jacking up the price. It’s about jacking up the value and letting the price reflect it.
Article Written by Omar Zenhom | 100MBA