how to define your prices
Some weeks ago we published a write up on Product, one of the 7P’s in your value proposition. We hopefully inspired you to have a closer look at whether you are really selling what you think you are selling and whether you are differentiated enough? Did you have a chance to do it? Did it make you consider applying some changes?
At least we hope we stirred up things a bit. Nothing new comes out of repeating the same thing over and over again.
In this article in this series will we continue were we left and look a bit more thorough at the P Price.
As always our small disclaimer. We are only here to inspire you to optimize and grow your business and we can’t give you a guarantee. But take advantage of our lessons learned the hard way.
As with the other P’s Price is an endless topic and 100’s of books have been written about pricing, pricing policies and best practices. Here is one also being an easy read. “The psychology of price: How to use price to increase demand, profit and customer satisfaction” by Leigh Caldwell. You can find it on Amazon.
In the scope of this article we will highlight some of those practices that might help you.
The Sweet Spot
As with your products and services also your price policy comes down to finding the sweet spot. You can try to establish that sweet spot by yourself, but at the end you are at the mercy of your customers although you of course have a variety of marketing tools to influence and bias their mercy so to speak. But eventually the sweet spot will be determined by them and not you.
It’s obvious that you would love to be able to cash in a high margin on each product or service provided by you and not just hoover over the breakeven point. So being at least profitable is basic. But as of that point how profitable you are is purely a question of the perceived value from your customers point of view vs your costs.
A way to do that before launching your products is of course to survey the market and get feedback from potential customers. Another way is by thoroughly making a matrix and benchmark your product up against the other ones out there and see where you objectively fit in. I say objectively because there is the factor of brand awareness and association that is difficult to put a value on.
Another way of doing it, either before are after launch is to resort to a technique that is normally used to improve websites, conversion rates, sign ups, clicks etc in the online world. Split testing (also referred to as A/B testing or multivariate testing).
Split testing is a method of conducting monitored, randomized (or not) experiments with the goal of improving customer response to your product and pricing. A simple way to do it is, especially online, is to alter between 2 prices for the same product on a constant basis (daily, weekly etc) to understand the price elasticity of your product (how much are people willing to spend). Another way is to launch the same product with two different messages, images, etc. Simply test what people respond to.
TIP: Do as much of this as you can previous to your launch, and preferably in a way that the customer don’t perceive that they are part of an experiment as customers most likely will be turned away by the duality in your pricing and marketing approach. A certain consistency foments trust.
Once you hit the sweet spot of what you and your products are worth for the customers then you have automatically also hit the sweet spot of your position in the market. Not just your price position observed isolated, but also in relation to what you offer.
Hence can you not study your desired market positioning from either P’s point of view, but have to force yourself to look at the entire value proposition that you are offering. You are working in a matrix of things. Having said that can you of course determine where in the market you want to position yourself in accordance to where your competitors are positioned on the value/money scale or to where your desired aspirations are, and we are by no means saying you shouldn’t do that. That means once identified the desired position you have to mould your value proposition to that position and the expectations that come with it.
Do you on the other hand already have a determined set of services and products, it only makes sense to offer a balance that your customers are comfortable with or attracted to. In other words is it difficult to make a 3 star hotel grasp for 5 star hotel guests.
So how does one offer that balance?
Let’s stick to our previous example of the guided tour business. Whether by foot, scooter, Segway, a FPV drone tour (First Person View… yes, they exist) or horseback, your customer doesn’t pay for what he thinks the tours costs you to organize plus a little margin for you… he pays for what he thinks its worth. It’s a very basic statement, but business owners tend to forget that. They add features, specs, bells and whistles to their products, but are then either not targeting the right audience for that upscale product or creating a service that no one was interested in in the first place.
Check out the trend over the last couple of years of high end customers (from a purchase power point of view) who pay fortunes to get back to basic. Simple, genuine and honest products. Whilst at the same time having other people with similar affluence preferably opting for the classical luxurious or even ostentatious touch. Then you have all those in between and of course you also have those on a tight budget.
Each of these brackets of clients have their own concept of perceived value and you must know that concept of theirs before you can design your product or service and before you can put a price tag on it. Whether to start with the product first and then the price or vice versa or whether to define which market you are interested in addressing is your decision. But the decision on either part has to be aligned. And don’t forget. Is your offer only catering to a very small market because of the value/money ratio, keep that offer but add another one with a slightly different ratio allowing you to target a potential larger customer base. Selling 1 at 1000EUR is just as good as selling 4 at 250EUR if the invested resources are the same.
Just keep in mind that you can only do that as long as both customer brackets are very confident about them having purchased two absolutely different products from a perceived value point of view despite being from the same brand (it’s a balance hard to strike… so be careful. You don’t want to undermine a product perceived as premium with suddenly masses displaying the same brand at an inferior price)
Price Wars – Competing on Price
Nowadays to find a market niche all to you is if not impossible at least rare. Transparency of things today makes it difficult to keep anything secret. But you surely can find less crowded markets which for small businesses unless they are revolutionising the market, might be the best suited.
Because once competition arrives, the to be harvested amount of customers need to be shared (although with the arrival of new competitors also new customers will come due to more marketing, noise, attention etc.)
Since the invention of currency or tradable value of whatever kind, along came negotiation, discounts and bargains. Hence many business owners when under pressure because of declining numbers of clients/turnover resort to pricing as their first option. The moral of competing on price however is very simple… there are two winners.
- The client will always win
- …and the competitor with the deepest pockets will win… the first round at least… until a competitor with even deeper pockets attacks you once your pockets are empty from last price war.
First best advice…don’t engage in competition on price. Yes… you will have to play along from time to time but try not to be the initiator. Again…find your sweet spot. Leave room for the one with a perceived inferior or superior product. Create clear brackets in the market and try to stay out of each other’s markets and make the customers that perceive you are in their sweet spot loyal to you. Price fixing between you and your competitor is illegal in the majority of countries and industries so don’t even think of going down that route.
But there are so many competitors in my segment you say. Well… choose another segment or differentiate on perceived value.
Improving & Optimising margins
Without entering the field of negotiation with your providers, contractors, employees etc. which you hopefully are doing on a regular basis already what can you then do to squeeze out an extra % of margin for all your effort?
If increasing your price isn’t an option because your customers don’t perceive the value to be worth it, or because it makes you a direct competitor to another brand, you are left with one option. Magic and illusions in the outmost positive interpretation of the concepts.
Bundle your product or service with another product, service, feature or add on that from a customer point of view give much bang for bucks from their perceived value, but at the least expense for you. Simultaneously package it in a way that your competitor doesn’t directly interpret it as an attack to his premium market when you start pricing it higher.
Some simple examples:
If your tour starts in the outskirts of the city but you happen to live in the city, include the service to bring your clients forth/back from the city centre (you have to go there anyway).
If you know that a shop, bakery, event etc. is going to have freebees, music, action of some sort, include it in the package for a small premium. It’s close to zero cost for you, extra perceived value for the client and won’t be seen as a direct competitive move as you are actually offering more than they are hence your increased price.
You get the idea.
You can’t always avoid to slash prices and to offer special promotions in order to attract potential customers still not knowing you or to make people repeat.
But also here, try to highlight your perceived worth in the eyes of existing customer in your promotion message to reduce the actual price adjustment to a minimum. Introduce bundling, one offs, bring a friend, future discounts and other promotion techniques, and communicate them in a such clear way that your competitor knows you are only trying to grow your market… not attack his.
Maybe all above sound a bit vague or theoretical, but all suggestions are merely simplified human psychology. The perceived value of the entire experience of being a customer with you is what determines what you can charge them. It’s about feelings, emotions, satisfaction, feeding that inner want to feel good part of us that you are appealing to.
So put yourself in your customers and competitor shoes and think of your value proposition including pricing from their point of view.
Sum up of question you have to ask yourself:
- Are your prices aligned with the perceived value of you service and brand (don’t forget that a lot of premium brands don’t sell a superior product but merely a superior experience, feel good factor and association and lifestyle)?
- Are you addressing the right market?
- Are you communicating clearly to clients as well as to competitor?
- And again… are you different and are you make it seen?
Don’t forget to check out our next article on Place and its impact on your business coming soon right here on our blog.
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If there is something you would like us to elaborate more on or something that wasn’t clear, then let us know and we will come back to you or maybe post it here on our blog. Please also feel free to comment here below.
See you next time. Until then good business!
About the autor:
Christian Funck, M.Sc. International Marketing & Management
Christian is Interim Manager, Consultant, Entrepreneur and highly experienced and versatile Leader in international context. 15 years+ experience in analysing/elaborating/implementing business and marketing strategies in culturally, politically and economic “adverse” conditions.