Pricing is by far the most powerful profit lever that business owners can influence. However, only some approach pricing in a way that fully capitalises on its value. For the majority of businesses, pricing is very much an afterthought. Customers who buy on price will bleed you dry if you let them, they will attempt to suck the life right out of your business. As there is no loyalty with shoppers who are price based only, they’re only in it for what’s in it for them and will change at the drop of a hat or £/$.
There are three golden rules for setting the perfect price.
Rule No.1. Your price has to be seen as good value.
This does not mean that your product or service has to be the cheapest on the market, it means that your product or service has to be viewed as offering the greatest value. Like beauty, value is in the eye of the beholder. This means you need to know what your customers value. The biggest mistake people make is to believe that they offer great value without testing that assumption, they also believe that price alone drives sales. Your ability to communicate value and sell that value is what drives sales.
However, the vast majority of people cannot communicate value; therefore, their prospect automatically defaults to the price as the primary decision-making factor. They can’t understand why they would pay more.
Customers choose the price they’re willing to pay based on the value that they perceive they will receive from a product or service. Prices based on costs invariably lead to one of the following two scenarios:-
1) If the price is higher than the customers’ perceived value the cost of sales goes up (if it happens at all), this leads to discounting pressure increases (leading to reduced prices anyway) and sales cycles are prolonged.
2) If the price is lower than the customers’ perceived value, sales are brisk, but businesses are leaving money on the table, and therefore are not maximising their profit.
Rule No.2. Your price has to be affordable to your target market.
As with Rule No.1 this does not mean that your product or service has to be the cheapest on the market, it means that your product or service has to be viewed as offering the greatest value to your target market. It’s no good if you set your price higher than your target market can afford.
If the people in your prospective market are strapped for cash they will be highly price sensitive, whereas if they have more disposable income price is less of an issue. Therefore it’s key you understand what your prospective customers value and their ability to pay.
If your target market is strapped for cash can you offer payment terms that would make the price achievable for them? For example, spreading the payments over several months is a common way of making the headline price less of an issue. So ask yourself. How can I find ways to make my product or service affordable when my target market is strapped for cash? It’s worth noting that even if your target market is the affluent they are often strapped for available cash.
Rule No.3. You have to understand the economics of your price even if you decide to sell at a loss.
Understanding the economics of price starts with knowing your costs, not just the cost associated with producing or procuring your product or service but all the costs associated with running your business. Cost includes everything you pay to deliver value to your customers/clients; delivery, installation overhead, marketing, commissions, cost of materials, financing etc. In most cases – but not necessarily all – you’ll want to price your product above your cost.
With your costs understood you’re well on your way to setting your prices, however, please don’t simply add a fixed percentage. This is lazy and it leads to you leaving a considerable amount of money on the table. You need to go back and refer to rule no.1 “people buy on value”.
Consider this. How much would Heinz sell a can of beans for if they just applied a standard margin to their production costs? A 415g can of beans is priced at £1.40 (Tesco’s correct as of February 2023), Aldi sells a similar tin of beans for 45p, so it’s obvious that Heinz is focusing on the value of being the number one brand in that marketplace gives them. In this case, selling their product for more than triple the price of Aldi.
Now that you know the three golden rules of pricing the next step is understanding how to communicate your value. Our pricing-cure course walks you through the process of “how to stop competing on price and finally have the confidence to charge your worth”. You can find out more about it here.