June 1, 2018

Max Price Formula: The First Needle

A few days ago, I presented you with the Max Price Formula which describes what I see as the the three key parameters that dictate the maximum price a buyer is willing to pay for a product or service:

( BUYING POWER * DESIRE ) / AVAILABLE OPTIONS

To be clear, I see this more as a useful mental model more than a precise mathematical calculation. I don’t expect anyone to attach units and values to these three subjective and intangible pricing considerations and come out with an exact dollar amount. It’s just meant to help illustrate the three needles that you can try to move if you want to increase your prices.

Today I’m going to talk about the first needle:

BUYING POWER

Of the three, buying power is probably the easiest to adjust in your favor. You can’t easily increase the amount of personal wealth or access to capital or annual budget of a particular buyer, but you certainly can orient your marketing activities to attract buyers who are more likely to have a lot of buying power.

For example, let’s say you make formal wear for dogs. You’d probably be able to charge more for a dog tuxedo in Beverly Hills than you would in Detroit.

If you researched dog owners in Beverly Hills vs those in Detroit, I’d guess that in general the two groups would:

• favor different breeds of dogs
• buy different brands of jeans
• wear different types of accessories
• drive different kinds of cars
• read different magazines
• eat different kinds of food
• and just generally have very different lives

I realize that these are broad generalizations and I’m not making a judgment call on one being better than the other. I’m just saying that it would be pretty hard to speak to both of these groups with the same marketing.

So if you want to appeal to a group with more buying power, it would seem sensible to target people who can afford to live in Beverly Hills, wear Kiton jeans, own diamond tiaras, and carry teacup chihuahuas around in their Louis Vuitton bags.

But you don’t make formal wear for dogs, do you? You offer professional services. Your buyers are probably folks who are running or working at a business.

That’s fine... the same principle applies.

Some business people have more buying power than others. You can probably make some broad generalizations that would help you focus your marketing toward the higher end of your market. Here are a few questions to get you thinking:

• Could you target companies that are more profitable?
• Could you target companies that have more employees?
• Could you target companies that have more locations?
• Could you target companies with bigger capital expenditures?
• Could you target buyers who are higher up in the organization?
• Could you target buyers who have more direct reports?
• Could you target buyers who control larger budgets?
• Could you target buyers who are closer to revenue generation?

The bottom line is that appealing to people who have control over more money is a needle that you can try to move to increase your prices.

Tomorrow, we’ll look at the second needle:

DESIRE

Stay tuned!

Yours,

—J

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