This month I thought I would provide some thoughts on pricing – an area which often gets overlooked and yet presents an opportunity to create value in every business.
The price is right – or is it?
Getting your price right is critical to your success.
On the optimistic side it means profits to reinvest in the future of your business, like marketing campaigns to win new customers and investing in new products to build your portfolio. Securing long-term growth and financial prosperity.
On the less optimistic side – get it wrong and it can mean customer losses, a weakening competitive position, upset customers and even business failure.
But it’s the summer and we’re feeling optimistic, so let’s focus on the positive.
An art or a science?
The way I think about pricing is it must reflect the customer’s perception of value. And the customer response to price is subjective, contextual and psychological.
Which means knowing your customer well. And setting a fair price level that your customers are prepared to pay for a product/service that they value. Or even better, presenting them with options (because everyone likes choices…)
But what about the science bit?
Knowing your variable costs is a good place to start. And taking a “cost plus” approach to setting prices is one approach, although beware this in isolation of customer and market intelligence.
My view is there is no “right price” – so we can’t be overly scientific.
But thinking about “cost-plus” combined with the following equation may help you get to the right range:
Price = Perceived Product/Service Value x Adjustment Factor*
* – the adjustment factor reflecting the strength of your brand, your position in the market, the maturity of your products/service and scarcity
Your customer’s perception is based on their experience – so strive to make it as good as it can be. Customer feedback is paramount – and remember high satisfaction levels uphold prices!
And if you can, secure testimonials or reviews – these convince potential customers that your product delivers value for a fair price.
What your investors want
In my experience, the right investors consider a range of factors when it comes to pricing. These include current and desired customer satisfaction/retention, growing the customer base, offsetting cost base pressures and maintaining competitiveness through pricing.
Leading to a well-considered pricing strategy aligned with a long-term sustainable business. The real key being customer satisfaction and retention.
Other investors may insist on price rises for short-term gains. I’ve seen this several times and I don’t favour this approach – every customer wanting to stay with you is much better than an increasing number begrudgingly staying with you or seeking out your competitors.
I’ve seen both – in my experience the long-term approach works best.
My advice then:
- Keep pricing strategy on your agenda and regularly review your prices.
- Gather customer insights, always give the very best customer experience, celebrate your positive reviews and monitor price levels for the alternatives in your market.
- Follow that up with insights from your data – test, measure and refine your prices and monitor the market – that way you will optimise revenue.
- Make sure your contractual terms and conditions cover price adjustments – at minimum to cover inflationary cost increases.
- And work hard to keep your costs manageable – know your margins and strive for value from your suppliers.
If you’re wondering whether your pricing strategy reflects the value your business delivers, I’d be delighted to discuss it with you. Please comment or get in touch.
