The Pricing Challenge
The pricing challenge
One of the most difficult challenges we face as business owners is getting our pricing right. In most cases, we start by under-charging and, over time hopefully arrive at a price point that is more fair for both us and our customers. That being said, raising prices is a challenge and many business owners chose not to do it, simply because they don’t want to rock the boat or turn away potential customers.
I’ve put together a couple of areas to consider when developing your pricing model to ensure you are being fairly compensated and are able to run a profitable business, because let’s face it, if you don’t make ends meet financially, you will be out of business before you know it, and then no one will be able to benefit from your products or services again.
Assess the marketplace
This is probably the area most people start with, sussing out what their competitors are charging, and trying to work back from there. Although this is useful information and important to consider, it’s not the be all and end all. In order to make an accurate assessment of whether what your competitors are charging is fair and profitable, you’d have to know a lot about the inside of their business before you could make that call. That being said, if your product or service exists within a cluttered market, the chances are you will need to sit somewhere within your competitor’s pricing ranges as your target market to some degree will be expecting these prices.
Every one of us thinks our business is better / different / unique when compared with our competitors, and in fairness we should think in that way otherwise, why even be in business?! However, it’s important to stay in touch with what your customer and potential customers actually think of your business in comparison to your competitors. If they can’t clearly see and feel the difference, they won’t necessarily be willing to pay more (or even less) for your product or service. You’ll need to convince them.
Of course there are some businesses that will be a completely new idea and have no real competitors to benchmark their pricing against, this is where the pricing challenge really heats up, and knowing what it costs you to produce or deliver, as well as testing the market, will be very important. Read on!
Know what it costs you
In my opinion, this is actually the most important place to start when it comes to pricing. What does it actually cost you to provide your service or bring your product to market. There is no point charging what your competitors charge if you can’t deliver the same thing for a price that allows the business to generate some profit. When working out what it costs you, don’t forget to include all of your fixed costs, like support staff, rent, marketing, shipping, travel, bills, etc. Although its important to assess the costs directly related to the product or service (referred to as top-line expenses on your balance sheet) you do also need to consider all of the other costs that come with bringing your product or service to market, and that includes everything.
Ideally you would aim for scalability in your business, meaning that your bottom line or fixed expenses might make your business more profitable over time as they can be kept down as you sell more. In many cases, business owners make a decision up front to take a hit on profit margins in the short term (this could be when launching a new product or service, or when in start-up phase), banking on the product or service being more profitable down the track. This is a reasonable decision to make, however needs to be based on realistic projections and consideration of costs. Anyone with basic ability to use excel should be able to throw together a quick projection of related costs and income. It’s worth taking the time to do this, in order to help you make sounds decisions.
Make it fair, for both parties
Speaking with many young entrepreneurs, I often hear that they don’t want to raise prices because they feel bad, they don’t want to rip people off or that they think that X price is too expensive. Well, what about you? By undercharging, you are ripping yourself off, and more than likely not being fairly compensated for what you are providing to your customers.
It’s important to remember that your pricing should be fair for both you, and your customer. Don’t forget about the value you are adding to your customers life, this is the intangible good stuff that they feel by using your product or service. It’s ok to put a price on this, and also on the fact that you have either studied really hard, or taken a big risk to be in a position to bring them your product or service. This is just something extra to consider that we often neglect to factor into our pricing models.
Test the market
Bearing basic economic principles in mind, we should all really aim to find the perfect balance between maximising the price that you are charging and what people are willing to pay. This means your business will be able to maximise profit while it can (enabling it to both grow and to build reserves) and when times are tough and profits may be reduced you can survive while you make changes to what you’re offering. So, how can we ensure we are charging enough, but also not missing out on additional that our customers would be willing to pay? Testing the market is the simple process of incrementally increasing your prices until such point that you start to get resistance to buy. You’ll often find people value what you do far more than you think and are in fact willing to pay more for it than you may have originally thought.
One of the most common things we do is undervalue ourselves and since our business is generally a good reflection on ourselves, this can often result in us charging less than we should. But we should never presume to know what others consider cheap or expensive, leave your expectations at the door.
Everything needs to be sold
If you’ve just started your business, or launched a new product or service, and are not making many sales yet, don’t immediately jump to the conclusion that your price is too high. We need to remind ourselves that essentially everything needs to be sold in some way shape or form, most of us have the hope that the day we start operating, our customers will see our product or service in the way that we do: amazing, excellent, needed, great value and desirable. In most cases, they don’t event know about it. It needs to essentially be sold to them.
As an example, I have been in financial services for many years, when I started my career, it was common for advisers to receive their fees through commissions on any investments or insurances that they established for clients. The advice was essentially provided in the hope that the client would go ahead and then a commission payment would be received. Back in these days, clients essentially didn’t have to pay for the advice at all, as the adviser would be paid directly by the insurance company or investment fund. Even then, when in the eyes of the client they didn’t need to part with anything, it was exactly the same level of challenge to get clients as it is today, when a flat fee for service and advice is the norm, with no commissions at all.
So, before you assume that your pricing is wrong, consider your sales process and whether the problem may in fact lie there.
Pricing is always a challenge and a contentious issue within most businesses. Just remember to charge fairly for what it is you do. If you are a low-end product or service, then charge accordingly, and if you are a high-end, tailored service or high-quality product then the same applies. In my Gen Y financial advisory business, Wealth Enhancers, our fees are definitely not the cheapest, in fact they’d be amongst some of the most expensive in our market place. But that is because we deliver a high level of service and advice, and with that comes substantial costs to the business. We also bear responsibility for the advice we provide and some consideration needs to be provided in return for that, as our clients are well protected against the advice we provide. Our target market except and respect that the fees they pay match the quality of service and advice they receive.
Disclaimer: Please note this article is of a general nature and should be used for informational and educational interest purposes only. Please seek professional advice before making any decisions in relation to your own personal circumstances.