How to not price your product like a moron

In 1799, a 12-year-old boy stumbled upon a large yellow rock resting in the waters of a river outside his house. The boy fished out the rock and showed it to his father, John Reed, a poor North Carolina farmer. While Reed thought the rock was out of the ordinary, he assumed it wasn’t worth much. For the next three years, he used the heavy stone as a doorstop.

Eventually, Reed’s curiosity got the better of him and he took the rock to a local jewel dealer to see what it was worth. The jewel dealer bought the 17-pound gold nugget from him for US$3.50 and later sold it for US$3,600.

When Reed found out that he had been swindled, his infuriation inspired him to start a gold mine, which sparked America’s very first gold rush.

For Reed, mistaking a 17-pound chunk of gold for just a pretty yellow stone cost him what today is worth US$60,000. Fortunately, he had some fire in his belly and became a very wealthy man. But the difference between Reed and many of today’s entrepreneurs was his ability to course-correct after undervaluing his product.

Many people make two mistakes when pricing a product: they either overvalue their product or undervalue it. In either case, they’ll go out of business if they don’t figure out the right amount to charge.

Questions to ask when determining product price

In this section, we’ll use a fictional company as an example. Let’s call it “Kitty Caps,” a startup that sells knitted hats for cats.

Photo credit: Vyacheslav Oseledko/Getty Images.

Here are a few questions Kitty Caps can ask that will help them determine their product pricing:

1. Who values my product the most?

Kitty Caps needs to find the group of people that value their products the most. There’s only one rule when doing this: They can’t be friends or family.

While Kitty Cap’s hats are worthless to dog owners, cat lovers would spend the last dollar in their pocket to buy one.

Cat owners are the people that value Kitty Cap’s products the most and, in turn, should be the target market.

Product pricing lesson 1: Some business owners think they have a worthless product because they are selling it to the wrong people. Find your cat lovers and invest all of your time and energy into selling to them.

2. Will the people who value my product most actually buy it?

To charge what you’re worth, know what you’re worth