The basics of good pricing.

Do you remember that television game show in which contestants competed to correctly guess the price of prizes? Do you remember how many of them got the price badly wrong?

Well, there are probably just as many businesses out there today guessing how they should price their products or services and leaving money on the table. Are you guilty of doing this?

The challenge starts with clearly understanding costs, your market – your customers and competitors – and the price you can charge. Too many businesses fail to regularly analyse these factors and create an appropriate pricing strategy.

Today, most small businesses price either by totalling up what they perceive to be their costs and adding a small amount for profit (the Cost Plus model). Or they look at their competitors’ prices and set their own slightly lower. So, what’s wrong with these approaches and what else can you do?

Most companies who use a Cost Plus approach, fail to take into account all of their costs, especially young businesses where the owners or directors do not take a realistic salary. Those who get their pricing right the first time, rarely review their costs each year, so their baseline shifts away from their real cost as time passes. Usually, these errors work against the business, giving them less, and sometimes no profit. In fact, there are some instances where you could say the business was actually paying customers for each sale.

So what’s the danger in pricing against the competition?

First, you don’t know how your competitors arrived at their prices. Perhaps they priced badly and make very little profit or lose money on each sale. If so, you certainly don’t want to copy this business practice. Even if your competitors use a Cost Plus pricing model, their costs could be radically different from your own. In these circumstances, you need to understand where you can reduce costs, or determine if you can raise you prices because you offer unique benefits. Perhaps you should consider doing both?

Finally, if your product or service offers truly unique benefits, you have the opportunity to set your price higher than the competition. To do so you must:

 

  • Assess your offerings characteristics (honestly!)
  • Determine how your offering is truly unique
  • Understand the value, both tangible and intangible, to your customer
  • Articulate this value clearly in your sales and marketing approach.

 

A good example is the iPhone. When iPhones first appeared they offered unique features, particularly to individuals who also used Apple Mac computers. Apple did not price these handsets against the traditional mobile phone, but charged a much higher price. These handsets sold in record numbers and held this premium pricing, well after copycat devices came to the market.

So, you don’t need to be the lowest price to win business. However, if you do plan to offer lowest cost products or services, make certain that you understand all your costs and work to reduce them where possible. Base these costs on your own business model, not the competition. Better still, package your offering to highlight the valuable, unique features and promote the benefits of these features to your customers.

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