Pricing – to Build YOUR Business
Why You Should Study Pricing
Pricing is somewhere between science and art. Setting a price on any product or service is something that SEEMS simple to many businesspeople, but requires serious thinking.
Many pricing models, even those taught in college, don’t produce the best profit – which is, after all, THE goal.
Too many organizations think that their focus should be on managing costs, instead of using a VALUE-BASED pricing model.
That focus on cost alone may not give them as much increased PROFIT as managing PRICES. IF pricing is managed correctly, an increase in price can produce much better results than a decrease in costs.
Most businesspeople have been taught that pricing strategy should reflect the ‘3 Cs’ of pricing:
- Cost-based Pricing – based on what it costs you to produce the product or service
- Customer-based Pricing - allowing your customers to dictate pricing policy
- Competition-based Pricing – pricing geared to what your competitors charge
While every company needs to understand Costs, Customers, and Competition, the 3 C’s are less-than-optimal methods that don’t produce the highest profit...
You have to know costs
There are many cases where companies had losses because they did not understand their TOTAL costs. One example would be a company that lost money because they didn’t realize how much expense they had in packaging. Another example would be a company that didn’t adequately allocate costs – their price only covered HALF of the total cost of the DELIVERED product. Another case would be companies that have a reserve for leased products and resell the product, at wholesale, in the pre-owned market without holistically analyzing transactions accordingly.
Lower profits or even actual losses can occur when business leaders don’t think through what can happen if they don’t analyze data points through the lifecycle of the product or service and allocate costs correctly.
Customer expectations need to be CONTROLLED
There are many examples of the dangers of customer-based pricing.
One example is Rubbermaid, which was acquired by Newell because they couldn’t continue to meet Wal-Mart’s pricing demands. Many other companies have also become dependent on their customer (such as different big-box retailers) because they “can’t afford to lose the business” those companies represent.
Another example is Netflix. When they tried to raise prices, they experienced a customer revolt and had to revert to their original price. Particularly in anything to do with online business, the user base is so passionate that managers are reluctant to charge more.
Customers need to be EDUCATED, as they were about Resident Evil 5, an online game. Before launching the new version, the company’s leaders went out on forums and sold the game by marketing the product based on its amazing capabilities.
Instead of being fearful of what customers will say – or refuse to pay – companies need to communicate the value of their offerings like Apple does with its September showcase events. (Convince your customers that its VALUE supports your product's price.)
Many times a company will copy their competitor’s price - and not conduct their research into what they could – and SHOULD – charge.
Businesses need to look at their REAL offer - their unique value proposition and price accordingly. If you have a better product or service, charge more for it.
Otherwise, you “commoditize” the product or service and customers see everybody’s offer as “more of the same.” That is a very slippery slope that can lead to price wars, which nobody wins.
The other issue with this approach is focusing purely on market share at any cost. “Growing share” tends to force companies to set a single price – which may be too low - when some different segments can be approached – and sold to – at higher profits.
The Bottom Line:
The 3 Cs AREN’T the pricing DOS, they’re the pricing DON'TS...
Businesses have to be smart and remain in charge of pricing to maximize profit. The Pricing DO'S:.
- Create Value
- Regulate how customers PERCEIVE Value through communication
- Define Value - Pre-empt competitors by setting the standard
My goal is to work with clients to focus on a complete analysis of each client's situation to determine how value-based pricing can best work for them. I will continue to help any business leaders identify and use tools that will help Build a Better Business.
Photo by Stefan Cosma on Unsplash