Pricing feels like a dangerous game.
How do you feel about what you charge your customers? Is it a planned strategy, or is it one of those things you feel like you put your hand over your eyes, took a stab in the dark and picked a number a little like playing pin the tail on the donkey?
So many business owners are absolutely confident about the solutions they offer and the value of what they do, but find it almost impossible to attach a price tag to it. There are a couple of problems with this. There are some obvious, extrinsic consequences for setting pricing without a proper strategy attached to it, such as undermining the profitability of the business, but there are a number of less obvious consequences that have a significant impact on the long-term success of a business.
- Making it all about the money
Many businesses feel that they have to be the cheapest in the market in order to be competitive, and will therefore focus on providing a service aimed at the lowest possible cost option. Unfortunately the unspoken result of doing this is that at every level of business operations, ‘as cheap as possible’ becomes the common theme. It almost always comes at a cost to the quality of the product or service and sets up a situation that continually forces a compromise on critical aspects of what makes the business successful in the first place. Competing on price means that the entire focus of operations becomes about balancing on a tight-rope of cost-cutting, and realistically it only works until there is someone else who is able or willing to compromise further in order to cut costs further than you can. In reality, the magic of your business is not about the thing, it’s about the problem you solve. So if the problem you are trying to solve is the cheapest possible option then that might be a winning formula for you. For everyone else, it shifts focus in the wrong direction, becomes a source of stress and ultimately undermines the long term success of the business.
- Undermining the value of your product
The reality is, there are people who actively seek out a $5 bottle of wine and those who seek out a $50 bottle of wine. Neither price is wrong, but the value that it represents will at least inform which bottle is chosen as a wedding present vs a raffle basket prize. There is a lot of research into the psychology of how people perceive what they have paid a high price for, but realistically we all take more care of something expensive than something that was super cheap. This issue, however, reaches in both directions. As human beings we tend to value what we pay more for, but we will also only pay more for something if we see the value it offers. This is where marketing and pricing go hand in hand – first set the price, then find a way to communicate the value of what you offer and why it’s worth the price you set.
- Attracting the wrong kind of customers
To take the previous point one step further, one of the hidden consequences of incorrect pricing is that it impacts who will come looking for your product. If you’re looking to sell an elite product, it is so important to spend time investigating what kind of people are most likely to recognise the value of what you offer so you can target your marketing to the spaces and methods most likely to reach them. If you create a product that is designed for one type of customer but price for another, you might find yourself confused about why the kind of people walking in the door are not really the kind you were imagining when you started out.
- Preventing more customers from being able to benefit from the solution you offer
This one is going to sound a little strange, but in reality if your business fails because it isn’t profitable, then you are preventing future customers from being able to benefit from what you do. If you are losing money on each sale, then you are literally paying your customers to be there. And if you are losing money on each sale, then simply marketing for more customers isn’t going to fix the problem, it will actually make it worse.
So what’s the solution?
The process of setting prices has complex elements but the guts of it is ultimately very simple: cost + profit = selling price. That being the case, the two critical elements that are a little more complex to figure out are the detail of the cost and the necessary profit.
Over the next two weeks we will explore more of this detail and we would love to work with you and your business to help look at your pricing structure. (Hot tip – there’s a lot more involved than most people acknowledge).
To get in touch, just click HERE and fill out the contact form and we’ll be in touch to make sure your business is pricing for the outcome you’re after.