Pricing Strategy; What Not to Do
Welcome to the continuation from my last article on “Key Foundation to Grow Profits” . If you read through the entire article, then you’ve probably identified that you need to increase your prices. But how to do so without losing customers is the number one question I receive.
You do this by selling the value of your product that supports your price. In order for you to understand the value of your product/service, you need to understand that you deserve to be paid what you’re worth.
So, how do you determine the dollar value that your product and service is worth? This is a complicated question without a template answer. But I will outline some things to consider as you evaluate your true value to the market.
But before I outline how to identify your value, I will first list the “what not to do’s.” These are common ways in which many businesses set their sales price. Even though there is a method to the madness, these “formulas” for setting a sales price are arbitrary at best as it usually does not factor in your “intellectual properties” that are part of your brand value.
Common Errors in Pricing:
- Cost plus pricing- This is when a business takes its cost of goods and marks it up a certain percentage. I.e. 30%, 40%, 50%, etc.
- Benchmarking- Researching the competition and positioning your price, below, at par or above them.
- Low price leader- This goes along with the benchmarking approach of setting your price below the competition in hopes that the increased volume will make up for lost profit margin.
What’s the Problem?
None of these methods takes into account any inherent value that your brand brings to the market. It assumes that your product is no better than the competition (commodity). Also, there probably is no forecasting involved to see what, if any, profits will be achieved when a conservative sales volume is achieved.
What I Hear
“I’m just trying to establish the market and then I’ll raise my prices at that point.” This is a common response when I identify that the business needs to increase their price. On the surface, it makes sense, to some degree. Unless you have eager investors that are willing to ride it out to the end, keeping your prices lower than your value will drive you out of business. Just ask Uber.
However, the reality is that the ability to raise the price either never happens or becomes very difficult to do later as the business has trained the market to pay the set price. So, it’s actually better to establish and charge a value based price in the beginning than to try and implement later after you’ve trained your market.
Case Study – Value Based Approach
I recently had a conversation with a marketing director for for a well known tech company. They recently entered a new market and were trying to establish a value based pricing strategy.
One of their challenges is that their competitors were either paying their way into the market or giving their products away in hopes of establishing a dominant brand presence. Once established they would start to charge a fair market price.
Problem with that is that none of the competitors had established the value that they bring to the customer since they were just out dueling each other with giveaways and sponsorships.
My friend’s company stayed the course and stuck with the brand strategy by selling on the value that they brought to their customers. Since the company was playing a different game from the competition, their messages stood out from the pack that was trying to buy their way in.
Results, they built a $500 million/year brand as a new entry into a crowded market. Are they profitable? Yes. Since they took a different approach than sponsoring their way into the market, their marketing budget was just about 15 – 20% of what their competitors spend in marketing dollars. So more dollars went to their bottom line.
So how do you determine your value based price? Stay tuned for the next article.