Price is the most oversimplified, undervalued and least well understood aspect of running a business. But it is also be one of the biggest leavers you can pull to increase profitability. So why do so many small and medium sized businesses put so little thought and consideration into how they set their prices?
Most businesses will tackle their pricing setting using two basic approaches:
- How much are my costs?
- What are my competitors charging?
Everybody does this whether they realise they are doing it, or not. This results in a price being set that (hopefully) includes a small margin and, more often than not, is set at a rate that is slightly cheaper than the benchmark competitor as a way of achieving some differentiation. This approach is based on the belief that price is the most important factor in any buying decision, so in order to compete, your product must be cheaper than your main competitors.
And that is often the end of the decision making process about what level of price you should set. No more thought than a cursory glance and ticking a few boxes to meet the minimum requirements to obtain a price for your product or service!
My mission is to help businesses understand how they can think about pricing in a much more considered and effective way, and in doing so offer new insights and ideas on how to evaluate your pricing strategy (if you even have one!).
There are many approaches you can consider for a successful pricing strategy, including the following:
- Cost plus margin
- Competitor based strategy
- Customer value strategy
- Segmentation based pricing
- Bundling your pricing
- Promotion pricing to attract new customers
- Upsell pricing to existing customers
- Plus many, many more.
If you want to adopt a premium price position, then how you communicate the value of your product or service is also critical. This will depend on the level of differentiation or uniqueness to your product, and how you compare it to other products or services.
Note: I do not mean this to include “profiteering”, i.e. the practice of deliberately increasing the price of your product to gain a short term improvement in profits at the expense of your customer. Price decisions should always be based on a fair exchange of value, for you and your customer. If you violate these principles, you will normally end up damaging your brand, your reputation and losing business as a result.
Most people will have an understanding of the basics of supply and demand. In a mature market, if you increase your prices, demand will drop and you will lose customers, right? Not necessarily. It depends on how you plan your price increase, how you target them, when you introduce them and how you communicate it. All of these things can be thought through with an effective pricing plan which will help you overcome any issues or obstacles in your path.
There is plenty of information out there that you can access about pricing but who wants to read through some dry pricing text books that only students or consultants read? My aim is to simplify and de-mystify the whole business of pricing so that you can become much more proficient in working out how to plan your pricing strategy for your business. So follow me on Twitter, Facebook or connect with me on LinkedIn and if you want to have a conversation about my unique price coaching service, then please email me directly.
Thanks for reading and I look forward to communicating with you further in the future on the fascinating topic of pricing!