Pricing is the single most important thing which effects the amount of profit a business makes. That’s because there’s no cost attached to a price rise – a business simply makes more profit on each sale it makes.
BUT lots of businesses have the wrong pricing strategy in place.
That means….
They don’t charge enough.
They have low profits (or losses) and a low bank balance.
They are scraping by and struggling to stay afloat.
Their owners are always worrying about cashflow and having to work long hours.
The GOOD NEWS is that the profits of a business can be quickly transformed if the RIGHT pricing strategy is put in place.
Having the right pricing strategy in place is a gamechanger for a business.
- It means you get paid a fair amount for the value you give your customers
- It helps customers decide to buy from you
- It pulls the right customers in and pushes the wrong customers away
- It increases your profits and your bank balance
SO, the question is how much should a business charge for the goods and services it sells?
This article will answer this question by outlining the benefits and pitfalls for 8 of the most common pricing strategies that business owners could and do use.
Let’s get started…
PRICING STRATEGIES
Strategy 1 : Competition Pricing
Competition pricing is when you set your prices based on what your competitors charge. Since you’re not charging more than the competition you can’t be accused of being expensive nor ripping anyone off. It somehow feels a ‘safe’ option.
Benefit
Relatively easy to work out and implement. Just ring round and ask your competitors for a quote. For new businesses starting out and you’re unsure what to charge this can be a sensible short-term strategy.
Pitfall
Comparing yourself to competitors must be avoided if you don’t want to handicap yourself as to how much profits you make. Maybe they’re losing money. Maybe the quality of their service isn’t as good as yours. Maybe their cost structure is different to yours. The fact is you don’t know. Copying their prices is likely to mean you end up not charging enough.
Strategy 2 : Charge a bit less…Pricing
This is essentially the same as the Competition Strategy EXCEPT that you see what the competitor’s prices…..and then charge a bit less.
Benefit
If you’re charging the lowest price then you’re doing it to increase the likelihood of winning the business.
Pitfall
Is essentially the same as the Competition Strategy. BUT an assumption is being made here that a slightly lower price means a lot more sales volume and that in turn means a lot more profit. This is rarely the case because…
- It assumes your competitors at those prices are making a profit – which they might not be.
- It assumes your competitors are providing the same service – which they won’t be.
- It assumes the new customers will stay loyal – which won’t be if they see someone cheaper.
- It assumes you will make a decent profit – which you might not.
Strategy 3 : Cost Plus Pricing
Take the cost of producing a product (or delivering a service) and then mark-up it up by adding a percentage to it. This strategy is commonly used by retailers who sell physical products.
Benefit
Relatively easy to work out and implement – especially for retailers.
Pitfall
Not good for service businesses. The value of the services is a lot higher than the cost of creating and delivering it. As a result, the mark up percentage used tends to be too low and the resulting sales price is disproportionately too low compared to the value given to the customer.
Strategy 4 : Time Based Pricing (cost per hour)
Decide on how much an hour you’re going to charge, then when invoicing a customer multiply that hourly rate by how much time you spent. Business owners using this strategy have a tendency to use hourly rates used by their competition (see strategy 1).
Benefit
Easy to implement. Helpful when starting out and you’re unsure what to charge. It can be helpful, if you’re unsure how much time it will take to complete a particular job.
Pitfall
Fundamentally customers are buying results or outcomes – they’re NOT buying time. By selling time can seriously limit your profits – there are only so many hours in a day you can work.
You could be worse off for doing a better job. For instance, the better you get the less time you spend doing a job. IF you don’t increase your hourly rates to reflect this then you’ll end up being less profitable simply because you’ve got less time to invoice customers.
Hourly rates are often set too low. This is often because business owners under-estimate either their business costs or the amount of unproductive time (whether it be holidays, training, seeing prospective customers & quoting, etc.). As a result, they’re not properly reflected in the hourly rate.
Strategy 5 : Economy Pricing
This strategy targets price-conscious customers by providing a no-frills service at low prices. In retail, Poundland sells every item for £1 whereas Ryan Air have a similar approach in the airline industry.
Benefit
Having a very clear and visible position in the market makes it much easier to attract those price-conscious customers.
Pitfall
To make a decent profit the business needs to be incredibly efficient and eliminated all waste which allows it to have incredibly low costs. This is hard to do and if it’s not done, then the business is highly likely to make losses rather than profits.
Bear in mind that there tend to be 2 types of price-conscious customers.
1 Those who don’t have lots of money and may struggle to afford what you offer.
2 Those who want extra stuff done for free and will complain/moan….all of which saps your energy and profits.
Strategy 6 : Promotional Pricing
To get a foothold in the market a business offers a much lower (i.e. ‘promotional’) price than the standard price. This lower promotional price only applies for a short period of time…after which the standard price applies.
Benefit
When launching a new product or service this is a useful tactic to use to quickly build some early momentum. By offering a lower promotional price it encourages customers to buy now.
Pitfall
Unless the length of time that the promotional price applies is short the ‘promotional price’ can turn into ‘standard price’. If that happens then the business will be locked into low prices and competing on price. As mentioned above that could well result in low profits or even losses.
Strategy 7 : Menu or Tiered Pricing
The Tiered Pricing strategy means the business doesn’t have a one size fits all. Instead, it has a range of levels of service or product – each with a different price. This is in fact quite a common strategy.
Costa Coffee : small or medium or large size of drinks
Railway : peak v off peak, first class v standard, open v closed tickets
Amazon : standard delivery v premium delivery
Benefit
This helps maximise customer sales. Choice means customers are more likely to buy because they can more easily find the level of service they want and at a price they’re willing to pay.
If all choices are profitable to you then those extra sales will generate more profit.
Pitfall
Compared to other pricing strategies this is more complicated to implement. Different service levels must be created. In doing so the business needs to check that each one (1) is profitable and (2) despite the added complexity is relatively straightforward to deliver.
Strategy 8 : Value Pricing
This is a completely different approach to every other strategy. The focus is about what value the customer gets – which is likely to be the value of the outcome or the results. The amount of time (or cost) that is needed to make and deliver the goods or service to the customer is irrelevant.
To calculate the price using the Value Pricing Strategy is a 3 step process.
Step 1 : Quantify the total value that the customer is going to get.
Step 2 : Decide what would be a fair split of that value between you and the customer.
Step 3 : Communicate the value and options to the customer.
For instance. A marketing business – how many more sales leads are likely to come from a campaign with each new customer being worth £x.
Pitfall
This is the hardest pricing strategy to implement. It is not easy to quantify the value of which a customer is likely to get. It’s also not easy to communicate both that value and your price in a way that the customer readily understands.
Benefit
Quite simply a business has a lot more scope for making a lot more profit for the same amount of time…as long as it generates lots of value for the customer.
FINAL THOUGHT
If you are serious about increasing the profits of your business it is important that you are charging your customers a fair price for everything that you do for them and the value you’re giving.
That means…
- Decide on the right pricing strategy for you.
- Decide on the changes you wish to make.
- Take action and implement those changes.
When it comes to pricing there is never a perfect solution – it is a case of regularly tweaking and then reviewing the results.
If you’d like to discuss any of the above or would like a chat to see how we can help drop us an email to [email protected] or call one of the team on 0161 410 0020.
