Supply & demand
At it's most simplest, we recognise that the dynamics of supply and demand in the marketplace is a basic law of economics that we cannot escape. And the more exclusive your service or product is perceived to be, the higher the price you could potentially be charging.
Sometimes price is negotiable
We also recognise that the price point where we position our product or service must exceed our costs by a certain margin that allows us to make a sustainable profit. Sometimes, we will be willing to negotiate and will agree to vary our prices based on the volume of an order or on the terms of payment of the customer. And there will be times when we run promotions on certain items, and will discount our prices.
Increasing your profit
We're in business to make money. In broad terms, there are 3 ways of increasing profit in your business.
i) increase the volume of your sales (up-selling, cross-selling, improve your marketing and sales conversion)
ii) reduce your operating costs (negotiate better rates from suppliers)
iii) raise your prices, thereby increasing the profit margin per sale (being careful to assess effects on sales volume)
But before making any decision to change your prices, what else should you consider?
An interview with a pricing expert ...
Jon Manning is the founder of a consulting business Sans-Prixthat offers expert guidance to both small and large business in how to determine a pricing structure that will best align with their overall business strategy. For more than ten years his business has assisted companies such as Sensis, Australian Unity, Flippa and Medibank.
Jon is also the founder of PricingProphets.com, a platform where SME's can ask a panel of global pricing experts and thought-leaders what price to charge for a product or service - and just as importantly, why.
I was delighted when Jon agreed to share with us some of his experience and insights into pricing decisions .....
1. Jon, what was your motivation when you first established your own consulting business?I returned to Australia from a six year stint in the UK in 2002. During that time, I'd done some really ground-breaking work (dynamic pricing on the High Streets of the UK, Europe and Main Street, USA). I looked around and saw so many companies doing a poor job with their pricing (eg using cost-plus), and thought to myself that, with my UK experience (and 15 years of Australian pricing experience before that), I could really add value to this business critical, but often neglected, function.
The reason I started PricingProphets was, when I told people what I did, the most common response I got was "Oh, you do pricing? How much should I charge for such-and-such?" I decided that I could solve that problem online, by ‘productising' a consulting service, and PricingProphets.com is the result.2. Deciding on a business name is one of the first big branding decisions that a budding entrepreneur makes. Do you go for something quirky and memorable, or something that represents the nature of our business? ....... Would you like to explain how you decided on your business name?
My first business I called Sans Prix. Like any French term, it has a few meanings: 'without price' and 'beyond price'. But it also means 'priceless', which is what I believe a knowledge of pricing is worth to a company (this was years before a credit card company’s advertising campaign of the same name) .My other business is called PricingProphets. I was originally going to call this business 'Crowded Price' (as it's a crowd sourcing website for pricing), but then I changed the business model slightly and that name wasn't suitable. I was coming back from a business trip to Shanghai, hadn't slept all flight, and was waiting for my bag to come off the carousel at Melbourne Airport. When it finally appeared, it was behind a big road case (which the owner nearly dropped on my foot), and painted on the side was "Community Prophets". Straight away, I grabbed my bag, called a Muslim friend of mine from the taxi to ensure that it would not be culturally offensive, got home and quickly registered the PricingProphets domain names and Twitter handle.
PricingProphets is obviously a play on words (pricing profits), but it also reflects the business model, where I am wanting to project the panel of experts as alike to “messengers” and “gurus”3. What should SME owners be considering when they are making decisions around pricing their products and services and where they want to position themselves in their market?
I think there are a couple of key considerations here. The first is to understand what value customers receive from their product or service. And that may not necessarily be what the SME thinks it is, because value is in the eyes of the beholder. Ask three people why they have private health insurance, and you'll get three different answers (get out of the public health system, get back to work / home quicker, get my choice of doctor)Secondly, because customers care about value, they don't care about the SME's costs. So price increases based on increases in the rate of inflation don't stick anymore.
Seth Godin summed this up beautifully once when he said: "If your customers only care about price, then the reason is probably because you haven't given them anything else to think about"4. Jon, quite often we see start-ups try and differentiate themselves by pricing low – what are your thoughts on this?
So there are positives and negatives here. Let's start with a couple of negatives. Firstly, if you can win a customer on price, you can lose a customer on price. So there's usually no customer loyalty when you’re playing the price game. And it’s often not long before a competitor aims to match, if not beat your price. Secondly, and you hear this so many times, the theory that you can start low and raise prices later – but rarely does this ever come true. My experience is that this is a complete fallacy.But a couple of positives ….. It is great for customer acquisition. And if you're disrupting an industry and your product is a component of what another company is offering as a bundle (think Skype disrupting telco's in the phone call space), then a penetration pricing strategy also makes sense. You just can't charge the same price the big boys are charging when you haven’t established either any brand recognition nor any real credibility.
5. Does it make any difference whether you’re a Business-to-Business (B2B) or Business-to-Consumer (B2C) as far as pricing decision making goes?
Once again, there are two considerations here. Yes, B2B pricing is different. It's more complex, it's less driven by technology (such as ecommerce, booking & reservations systems, point-of-sale systems), customer volumes are typically lower, and there are more dimensions and stakeholders involved (finance want profitability, marketing want market share, sales want discounts to close deals). You often have to deal with the arch-enemy of Pricing in B2B environments: the Procurement Manager.But what they do have in common is, at the end of the day, they are both dealing with human behaviour and decision-making: do I buy or don't I?
6. When customers are making judgements about what seems a “fair price” they weigh up the value they would be receiving in the exchange ...... What can small business owners do to add “extra value” and attempt to strengthen customer loyalty?
There are two critically important rules of pricing. The first is that value is in the eyes of the beholder. We talked about that a few minutes ago. If all value is subjective and in the piercing eyes of the beholder, then the key for SME's is to work out what represents "extra value" to the customer. Ideally, you should be looking for something that is of low costs to the SME, but of high perceived value to the buyer. For example, maybe including same-day delivery of your product when a certain volume is purchased – or making coffee available in the waiting area if customers are not being served immediately – or free gift wrapping. The second rule of pricing is that all value is contextual. People pay more for a cold beer in a five star hotel than they do in their corner grocery store, despite the fact it's the same beer. So if an SME can create a premium context, they should be able to charge premium prices.
7. Any final tips on marketing and pricing Jon?
Firstly, there is no bank in the world that accepts a deposit of market share, Facebook fans, Twitter followers or newsletter subscribers. They only accept a deposit of cash, and you earn that cash from optimising the pricing of your product or service. It's worth investing the time, thought and research to get it right…… at least as much time as what many SME’s are allocating to their social media marketing campaigns (where it seems to me that “ROI” is difficult to quantify)Secondly, where possible, I recommend to my clients that they always try to offer customers three choices. If you give the customer one choice, you've got a 50:50 chance of closing the sale. If you give customers two choices, you are putting them in a position where they have to make a price-based decision. But when you give the customer three choices, two things happen. Firstly, they start thinking to themselves "which one do I buy?" (not, should I buy from this vendor?), and secondly, you're now asking them to make a value-based decision.
Thanks for your thoughts and tips on pricing, Jon.
There's no doubt that small business can't compete with larger businesses on price alone - because of their advantage with volume, their costs will be lower. So it is essential to look creatively for opportunities to "add extra value" to the experience of the customer if we're going to succeed in building customer loyalty. Of course, if you can also build brand awareness within your local community, this will provide your business with some protection in the event of a "price war" erupting in the wider market.
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