Set a price from the value gap, not from competitors

The rule this page argues for runs in one direction only: upward, by enough that a buyer pauses. This page gives no figure for the lowest price you should charge.

1. The gap between price and value

People buy because they believe what they get back is worth more than what they hand over. They go on buying for as long as that gap stays open. The moment the value they see drops to the price, or below it, you have reached the point of no return:

• On a subscription, that is the month they cancel.
• On a physical product or a one-time service, that is the point where they do not come back and do not send anyone to you.

Most businesses sit at or under that line, which is why they get one sale per customer and have to go out and find a new customer for every sale they make. Owners in that position usually describe the problem the other way round — that they are excellent at the work and cannot find buyers. The harder reading is that average work puts you on or below the line, and repeat business does not start at above average. It starts at remarkable: good enough that people talk about you unasked.

There are two ways to widen the gap, and only one of them is worth using.

Move	Effect	Verdict
Cut the price	Closes the gap from below, and has a floor at zero	A one-way road to failure
Raise the value, and how much of it the buyer perceives	Opens the gap from above, with no ceiling	The move to make

That asymmetry is the whole point. A price can only fall so far. What a buyer perceives as worth having can keep climbing.

1.1 Why the ceiling matters more than the floor

Hold two purchases side by side. Someone earning $6.75 an hour buys a $13 burger: close to two hours of working life. Someone whose time is worth $25,000 an hour buys a $50,000 burger: also two hours. The two purchases cost their buyers the same thing.

There is a loose end in the second figure. The buyer's yearly income appears as $20 million or $30 million, and also as possibly $50 million, while the hourly rate used is $25,000. This page does not settle which reading is right. What the comparison rests on is the two-hour equivalence, and that holds at the hourly rate as stated.

The working goal follows: sell dollars at a discount. The buyer should feel that each dollar spent with you returns more than a dollar spent anywhere else. The question is not how many dollars they part with; it is what each one buys.

2. The downward cycle, and why almost everyone is in it

Here is the pricing method in ordinary use:

1. Look at the market.
2. See what competitors are charging.
3. Take the average.
4. Go slightly below it, to stay competitive.
5. Offer what the competition offers, plus a little more.
6. Arrive at more for less.

Steps 5 and 6 then repeat. A little more for a little less, again and again, until you are giving away everything for nothing and cannot work out why the business does not make money. What you are pricing for at that point is market efficiency, and unsophisticated competitors will run the same loop beside you until there is almost no profit left in anybody's business. The overhead stays where it is; the profit is what gets squeezed out. Most of the field either closes or stays barely above water, month after month, waiting for a corner that never arrives — because they are trying to do the same thing better, when the way out is to do something different.

So do not model the field. The uncomfortable observation underneath this is that most owners who look successful are not, and copying their prices copies their results.

3. The upward cycle

Raise the price and these move for the client, in this order:

For the client	Raise the price	Cut the price
Emotional investment	Rises	Falls
Perceived value of what you sell	Rises	Falls
Results they actually get	Rise, because they are more invested	Fall
How demanding they are	Falls	Rises — the people who pay least ask most
Money available to serve each one	Rises	Falls

And these move for the business:

For the business	Raise the price	Cut the price
Profit	Rises	Falls
How you see yourself	Rises — you are a premium provider in a category of one	Falls into low-cost self-description
Belief in your own impact	Rises, because clients are getting results	Falls, and conviction goes with it
Level of service	Rises — there is money to attract and pay better people	Falls, because there is no margin left to spend
Conviction in whoever sells	Rises	Falls, and buyers hear it

It turns in a circle, which is the point of calling it a cycle: each effect feeds the next one. Run it downward and the same circle works against you.

Cut far enough and you stop believing in the work, and buyers decline for a reason they will never say out loud: you were not convinced yourself.

4. Price is a message about value

A blind tasting was run on three wines, priced low, middling and high, with the prices visible to the tasters. They rated them in the order you would expect: the cheap one worst, the middle one middling, the expensive one best. All three glasses held the same wine, poured into different bottles and given different price tags. No published reference is given for this test.

Read what that means for a seller. It is not only that a better product lets you charge more. A higher price also makes the product better in the only place the judgment happens — the buyer's experience of it. If one change both raised your revenue and improved what your clients believed they were getting, there is no argument for leaving it alone except nerves.

The long-run version is a confectioner bought for $24 million roughly thirty or forty years ago, which has since returned a billion dollars in free cash flow after reinvestment. The method was raising prices every single year, by 5 or 6 percent, faster than inflation. Chocolate turned out to be fairly inelastic: buyers would pay $40, $50, $60 for a box, where at the start of that stretch the same box sold nowhere near those figures. Profit rose, perceived quality rose, and the lever was a number on a label.

Flag: the confectioner's rises. SOP 79, section 5, and SOP 83, section 2, give the same case larger yearly rises. Copy 5 or 6 percent and each yearly step stays small; copy their figures and single steps run far larger. This page does not settle which reading is right.

5. How far above the market to sit

Be more expensive than everyone else by enough that the buyer has to stop and think: this cannot be the same kind of thing as the rest. That pause is what puts you in a category of one. A little more expensive does not do it; the distance has to be visible.

A worked case. On entering a market where the priciest competitor charged $5,000, the smallest thing a buyer could purchase was $16,000, and the next thing up was $126,000. The distance was wide enough that buyers concluded something different must be on offer, because nothing priced that way could be the same.

The distance also pays for itself. A competitor at $5,000 has to earn a margin out of $5,000. At $16,000 you can put $5,000 straight into the experience — the whole of the competitor's price, spent on making the client's outcome better. Better results follow, then higher perceived value, then referrals, and the cycle in §3 is running in your favor.

5.1 Check what a different offer does to the whole funnel

Price is only one of the lines a differentiated offer changes. To see the full effect, lay the funnel out line by line for the current offer, then again for the new one, holding the advertising spend and the reach the same: response rate, appointments booked, show rate, close rate, price collected up front, cash collected, and the return on the advertising spend.

A better offer can move several of those lines at once: more people respond, a larger share of them buy, and each one pays more. Those rates multiply, so the gains compound instead of adding up, and the same spend can go from losing money on every new customer to being paid to win them.

The figures in this example are invented.

Line	Current offer	Differentiated offer
Advertising spend	$4,000	$4,000
People who respond and book	50	75, or 1.5 times as many
Show rate	60 percent, so 30 show	60 percent, so 45 show
Close rate	20 percent, so 6 buy	40 percent, so 18 buy: twice the rate
Price collected up front	$400	$1,200, or 3 times as much
Cash collected	$2,400	$21,600
Return on advertising spend	0.6 to 1	5.4 to 1

The changes multiply: 1.5 times 2 times 3 is 9, and $2,400 times 9 is $21,600. The first version gets back 60 cents of each advertising dollar up front; the second takes in $5.40.

6. The ethics, where the client has to do the work

Where a client must act to succeed — anything you hand them to do, or do alongside them — the higher price is the more ethical one. More investment means more commitment, and more commitment means better outcomes. The claim to be helping someone as much as you can obliges you to get them invested in the result.

The same move raises the quality of who comes in. A price is a barrier to entry, so raising it improves the people who cross it; better people succeed more often; your product becomes better measured the only way that counts, by how many of your customers get what they came for. They also stop comparing you to anyone, because nobody else is in your range, and you can do things competitors cannot, because you have margin they do not.

7. The order of work

• First. Establish that the gap between price and perceived value is open, and that clients are getting results worth talking about.
• Then. Rule out the downward move. Cutting the price is not on the table.
• Then. Set the price far enough above the field that a buyer must stop and re-categorize you.
• Then. Run the current offer and the new one through the funnel on the same spend, line by line (§5.1).
• Then. Spend the difference on the client's experience, deliberately and visibly.
• Last. Watch the client effects and the business effects in §3 and confirm they are moving the way the cycle says they should.

8. What this page does not cover

Which market to be in, and what to put inside the offer, are not covered on this page. Market choice is on SOP 1. What you deliver for the money is on SOP 4 and SOP 5. The variables that decide how much value a buyer perceives are on SOP 3; choosing a pricing model, and the rules for where to set a price and how far to push it, are on SOP 82.