How To Price Product & Services
ATTRACTING VALUE DRIVEN CUSTOMERS
Pricing for most businesses is not something they love talking about. For most it is genuinely something that causes a lot of stress and worry. That is because for most businesses it means discussing their low margins, small profits and difficult customers that don’t pay them enough. About time we change that! Let’s discuss how you can change the way customers view your business and as a result change what they are willing to pay you.
Pricing, and business at its core, is about the exchange of value, we all know this. I value the product you’re offering more than I do the $20 in my pocket, and you value my $20 more than you do the product you have. Simple!
However, to price effectively as a business we must ensure that our pricing allows for coverage of both costs and adequate profit. The profit we receive in many ways is based on the value discrepancy between what you are offering and what someone is willing to pay. What does this mean? Well it means that the value discrepancy is the determining factor in how much you can charge. The good news is that value is fluid because it is based on an individual’s perception and is not fixed.
Therefore it is logical to conclude that the profit we make can be increased by adjusting how customers perceive the value associated with our products or services. So how do we do this? Through the implementation of effective positioning. In fact I would argue that pricing is a direct representation of how good your positioning actually is.
A poorly positioned business means you have failed to assess the market and find tangible ways to differentiate your business. Poorly positioned businesses are viewed as a commodity. They have a large number of competitors that offer, at least in the eyes of the customer, similar products or services. The customers compare your business like they compare Apples, they see no real difference and therefore go with what is cheapest. When your business is a commodity you attract price driven customers.
There are a number of negative consequences of having price driven customers. From the customer’s perspective you are replaceable and therefore they are less emotionally invested in your products or services and are less loyal to you. They also have more leverage and become more demanding, sensing your need to compete with competitors. From the business perspective you are often forced to lower prices to remain competitive. As a result profits decrease, services levels are minimised and the business becomes stuck in a cycle of survival.
Gyms are one of the most common businesses that I come across that are stuck in this cycle. Through lack of effective positioning they are quickly commoditised. When discussing pricing with gym owners I ask how they came up with their pricing strategy, I usually get the same answer. They looked at what others were offering, then either priced the same or slightly lower, and finally added a ‘little more’ as a sweetener so the customer would pick them. Basically they attract price-driven customers by offering more for less, with little to no thought about differentiation, the value discrepancy or infact the problems the customers’ are experiencing. A customer won on price will be lost on price.
What can we do to develop a more effective pricing strategy that is both fair and allows for increased profit?
We can start by ensuring that we make a point to develop courageous and effective positioning for our business. This positioning will destroy the direct comparisons that exist and change perceptions so your business is viewed as something entirely different. When we remove comparisons we change how our business is perceived, we are no longer replaceable like commoditised businesses. As a result we no longer attract price driven customers but instead attract value driven customers.
What does value driven customers mean for our business? It means that customers no longer look elsewhere for price comparison from competitors’. Why? because the customer is more interested in the value that your differentiated product brings, the fact that it is differentiated makes comparisons impossible. As I mentioned earlier it is the perception of a value discrepancy from your differentiation that allows for this increased pricing.
This increase in pricing has a number of positive consequences for customers and our business. From the customers perspective they have more emotional investment into your products and services and an increased perception of value in what you are offering. This brings about an increased amount of respect in your business and as a consequence better results.
Isn’t it amazing how the implementation of branding and positioning principles can have such a dramatic impact on your business! But then again considering the fact that these principles directly impact how your business is perceived, and perception is the biggest determining factor in the value customers believe your products and services bring. It probably isn’t so much amazing as it is highly logical.
There are other aspects that must be considered with your pricing strategy as they can hurt your positioning, and sales. If branding, positioning and marketing are all about perception, then what we do with our pricing can affect this perception dramatically and do harm to our business.
Two pricing actions that can do damage are discounting, and inconsistent price increases. These actions are not necessarily bad as much as they must be approached carefully
Let’s start with discounting. I will start by admitting I am not a big fan of discounting. I find it is often implemented because of lazy marketing or lack of understanding of alternative approaches. It does not show courageous positioning but a lack of confidence in the value your business brings. It can also negatively impact sales, customers learn to wait until discounts are on before they consider buying.
Think about your own purchasing habits, do you wait for certain products to go on sale before buying? Why is that? It’s because you know the sale is coming so why pay full price. If you have never done the numbers it also might surprise you the increase in volume necessary is disproportionately high in order to get the same results.
Another pricing action that can harm your business is increasing the price to current customers and clientele without adding value. This can have varying degrees of impact depending on your business and the market you are in. The reason this can impact your business is because of the Anchoring Bias. The anchoring bias is a cognitive bias that causes us to rely too heavily on the first piece of information we are given about a topic. For businesses this means that customers become anchored by the price we initially charge, when the price increases customers feel ripped off because their perception of the value you provide is attached to the initial price.
So what’s the alternative?
There are many, the one that I will leave you with is once again understanding the fact that purchasing is about the value discrepancy between what you charge and what the customers perceived value of your products and services are. Using that as a basis of thinking moving forward it is more beneficial for you to add more value and simultaneously increase your price, instead of offering discounts or price rises without value ads.
Finally I leave you with the thought that when you position your business correctly you open yourself up to value driven customers. Value driven customers that are presented with offers with a large value discrepancy will pay significantly more. Doing this correctly results in customers spending more, your business becoming more profitable and you reaping all the benefits that come along with that. The consequences of this are beneficial to both the customer and your business.
How has your positioning affected your value discrepancy? Are you commoditised? Are you attracting price driven customers or value driven customers?