Pricing strategy

As we know – if the price is set too high, we lose the sale. Set it too low and we leave money on the table. In other words, the customer will quickly provide us with feedback on whether we’ve chosen the right price for our product or service. So, what factors should we consider?

The following tips are meant to be practical and useful, based upon what I have seen work spectacularly well and what I have seen cause truly disastrous consequences. “Will I know which is which?” I hear you ask. I’m sure that you shall. Now, I only have room for 10 so I’ve had to choose my personal favourites. These are:

  1. No surprises. Always agree the price in advance – that prevents relationship breakdowns caused by misunderstandings. Remember vehicle service businesses getting this wrong in the past? The bill was always a shock when you picked up your car. Instant dissatisfaction and any compromise results in both parties losing out. I always agree my prices – if the prospect doesn’t want to pay, I don’t do the work. Test the temperature nice and early!
  2. Use price as a tool to vary demand for your product and thus choose customers you want to win, retain and lose. Probably obvious and rather a general rule, but increasing price will tend to lower demand and reducing price should increase it. Most businesses don’t want to attract everyone, so I usually recommend increasing the price just enough to attract ‘B’ grade customers, but deter ‘C’s. ‘C’s typically create too much effort compared to the reward, causing cross-subsidy of profit and focus away from the valuable ‘A’s and ‘B’s. Remember the Pareto (80:20 rule):
    1. 20% of your customers generate 80% of your sales
    2. 20% of your products generate 80% of your sales
    3. 20% of your customers generate 80% of your profit
    4. 20% of your customers generate 80% of your hassle!
  3. Never agree a discount without reducing something in the value proposition, unless you have a planned promotion. Controversial? Well, consider this: people subconsciously align the perceived value of goods and services with their cost.
  4. Arrive at your price from two angles:
    1. Traditional “cost plus” (materials, labour and possibly overhead + a little profit for you of course) and
    2. What is the market likely to pay for your product, based upon competitor products and prices? Research the market, so you have some certainty on how to position your product. So many businesses simply don’t bother to do this.
  5. Once you have done the research and carefully selected your price – you can have the courage to believe in it. Don’t be embarrassed by it. For example, I gained a different perspective on my day rate when I found out that the garage where I had my car serviced were charging £125 per hour for the mechanic. Remember the perception issue in tip 3.
  6. Allocate a percentage of sales to give away to a good cause – after all, you get your income from the community, so why not give something back? Be very selective and make sure you are benefiting the intended target. You win too of course, because you feed your self-worth.
  7. Check where your product/service is on its life-cycle – if it’s in the growth phase, it should be easy to grab sales as there’s plenty to go around and the price is less important to the buyer. If the product is in decline, or has commoditised, then demand may be shrinking. Awareness and knowledge will make the right pricing decisions obvious.
  8. Don’t copy everyone else – look at innovative ways to differentiate your offering through pricing policy. I don’t just mean being the cheapest. Explore other ideas. Can you fix, be transparent, guarantee in some way, link price to value or even let the customer decide?
  9. Be reluctant to promote price your key differentiator, unless you believe the customer prioritises price ahead of quality or service. Even if you believe they do:
    1. Check that your perception is the reality, not just an assumption. My experience is that pricing issues only tend to score about 7 out of 10 in importance. A focus group or survey should deliver the feedback you need.
    2. Remember that “cheapest price” isn’t the only option – you might get some traction from “fixed price”, “transparent”, “flexible”, “value-based” or even “most expensive”?
  10. Avoid common errors:
    1. Many businesses choose to be “bottom feeders”. They select a poor target market that delivers rather predictable outcomes – lack of money, low margins, bad debts, disproportionate time spent on servicing customer demands and even broken promises.
    2. “Mates rates”. If you offer discounts, your customers will recommend hoards of additional customers wanting the same deal. This can lead to you being a “busy fool” – working flat out or piling up stock, but not making any money.
    3. “Scope creep” – very common when selling services. Giving extras without agreeing an additional price at the time.
    4. Simply being too cheap, often caused by a lack of research or a lack of confidence in the product. There’s nothing wrong in being “Expensive, but really good value for money”. It’s so much better than “Good, but really expensive”. The “but” eliminates everything that precedes it!

Pricing policy is a critical success factor for any business. I have found that adopting a more strategic approach to pricing can have a major impact on the trajectory of the whole business.

About paulhopwood

Teaching, guiding and mentoring professional service firms and successful business owners, providing them with time to think. Love family, reading and walking. Brighton UK
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