Pricing

Pricing is the bane of most small businesses. It is a balancing act between not undervaluing your services on the one hand and not driving away potential customers on the other. However pricing can be a powerful way of attracting the right sort of customer, for example a £40 Swatch will tell you the time as well as a £3,000 Rolex but the aspirations, attitudes and interests of the wearers might be markedly different. As part of your marketing analysis you will have gone through the P's of Product, Placement and Pricing and identified the segment you are trying to reach. Pricing will form a part of that, but how should you charge?

Firstly: recognise that price and cost are different. Generally you can control price but costs tend to be fairly constant. The amount you need to earn, the telephone bill, petrol etc will all be elements that you need to cover but the price you charge for your time or product need not depend on any of the underlying costs. From a strategic perspective there are only a handful of strategies which are combinations of perceived added value and price. Low price as a strategy rarely works for long as someone will always find a way to undercut you. The range of responses to cheaper competition can only be to cut your margins and watch yourself go out of business. If you are differentiating your offering you can usually find a new slant that makes you more attractive despite the price.

There are broadly three ways to price your offerings:

1. Cost plus
2. Benchmark
3. Value Pricing

Cost plus is the easiest, you take all your costs add a percentage mark-up and divide by the number of units or days. While this works fine for products, it is less useful for services. In the case of products generating more income is achieved by selling more product. As services are mostly time dependent you are limited by the number of hours available and you will reach a ceiling beyond which you can only grow by adding staff or building a Tardis. If this doesn't fit with your aspirations or skills, you probably need to find another pricing model.

Benchmarking looks at the competition and aims to price yourself at a point where it isn't an issue and allows you to win work by differentiating yourself from everyone else by offering improved service. How do you benchmark? One approach is when you lose a job to the competition, call the ex-customer and (nicely) ask why they went with someone else. Tell them you want to know so you can improve your service, and as a last question ask what they are paying. It's not a good approach to simply adjust your price to match. Instead do some serious thinking about what you can do to be better than your competition or to operate in a different segment.

Value Pricing seeks to link your price to the value you are creating for the client, if by using your service they can make an extra £10,000 a week your £10.99 an hour service can look a tad under priced. The key here is to ask the right questions of your client when you are selling and to paint the right vision of the value you will be adding. Be sure that you understand their business model, where your offering will be adding value and importantly, how much that is worth to them. Your price should reflect the value it will bring to the client.

While there is no such thing as the right price, (sorry Bruce), there are a number of steps you should go through to arrive at an appropriate pricing model, among others consider:

• Understand your costs, and make sure that you include everything.
• Understand the segment you are trying to reach. Low cost can kill a sale as easily as a high cost as it can send the wrong message.
• Use an appropriate pricing approach to arrive at a price. If you decide to value-price you will be charging each customer a different sum so you won't be publishing a price list or a day rate. If you are using cost plus, publishing a price list will give it credibility and fewer customers will challenge it.
• Offering discounts is fine as a marketing approach but not if it means you are working to cover your costs. If you are doing this you need to stop and rethink.

I hope you find this useful. If you would like to spend half a day talking about costs, pricing and benchmarking contact me here.