Pricing strategy that drives profit

Pricing is underestimated as a driver of business growth

“Getting new customers” is what business owners first think about when they want to grow.

Then they think of “selling more to existing customers”. These are both plausible ways to grow a business… though a change in pricing can bring even better results to the bottom line.

But how much should you actually charge?

What if you lose customers because prices are too high? These risks can be reduced through good pricing strategy. Here are some points to consider:

1“Cost plus” analysis

This is a starting point which signals the minimum price you’d consider charging to remain profitable. For example, in an accounting business like Salisburys, gross margins are relatively easy to calculate because Costs of Good Sold are mostly labour costs.

2Competitor Pricing

The general rule is customers will buy from the cheapest supplier PROVIDED THAT they have perfect information on all products (i.e. price comparisons are readily accessible), which they seldom are. Also, this assumes competing products are (perceived to be) identical, which they seldom are. If you plan to price your products more than the competition, you will need to persuade the buyer that you have some competitive advantage.

3. Important Price Points

Consider the pricing ‘extremes’ and other major price points. At what price is your service so expensive that no one would buy it? At what point is your service so cheap that no one would buy it (for a perceived lack of quality)? At what point is your service getting expensive, but some would consider purchasing it? At what point is your service viewed as a really great deal?

4. Premium Pricing (or luxury pricing)

This examines the perceived value of a product rather than the actual value or production cost. If your product is considered luxurious, exclusive or rare (such as a public image adviser to celebrity clients), this may apply.

5. Surge pricing, demand pricing or time-based pricing

This acknowledges the fact that a customer’s willingness to pay varies based on the time or circumstances. It occurs in ALL businesses. A customer who is facing a heavy penalty or is under time pressure may pay a higher fee for a service. A flexible pricing strategy in response is helpful.

6Value pricing

In this case, you price your products based on what the customer is willing to pay. Put another way, you price based on the economic value your customer puts on the product. This can be useful IF you REALLY understand your customer, their situation, their persona and thought processes.

7. Transactional pricing

What is the lifetime value (LTV) of your customer? Is this the only deal you are likely to do with this client? If so, you should recover as much value as possible from this transaction. That’s not the case if there are many up-selling opportunities.

8. Payment terms

Payment terms form an important part of pricing. Would you rather receive $100 today or $150 in three months? As important, perhaps, would your customer rather PAY $100 today or $150 in three months? The value of cash in your business and the risks of waiting for payment will influence price strategy.

9.  Price Sensitivity

How would customers react to a change in price? If your customers continue to buy from you after you raise prices, that means they are not ‘price sensitive’ (or the market is ‘price elastic’). It might also mean that your pricing is too low (compared to market rates). This will probably vary by service. For example, increasing the price of a ‘commoditized’ service such as filing a tax return, will result in a significant reduction in demand.

10Discounts / promotions

Some businesses will never offer discounts while for others, this will be normal practice. An important question is what advantage you secure by offering a discount. Does this increase the chance of closing a deal? Does it result in a more loyal customer? The same can be said for promotions or ‘specials’ (such as buy-one, get-one-free)

Some final points

  • Keep pricing simple: Sometimes the actual price (the quantum) is over-emphasised compared to the transparency of pricing. In a service business, for example, the price may be unclear at the outset of the project.
  • Reassuring the customer about HOW the price will be calculated and the RANGE of pricing they can expect can be as important as the size of the final bill. A project-based (fixed) price strategy often overcomes this concern.
  • Modify your products to make them more attractive (and attract a higher price): For example, in accounting, lodging a tax return will attract a certain price but what if this were ‘bundled’ with other related (or unrelated) services? We need to consider what our clients value eg access to our team? Commentary / analysis on the state of their business? An event invitation? Perhaps you too can configure products so that they can deserve a higher price than the individual parts.
  • Adjust your pricing often: Businesses that consistently re-evaluate price get better outcomes, so this should be built into regular business planning.

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