Businesses sell stuff. That’s business 101.
Whether it’s a product or service, something is provided to the consumer in exchange for money.
*Unless we’re talking barter, or contra, but even then a price or assignment of value needs to be decided. Like how many goats are worth that canoe…
Charge too much and their won’t be any demand (the price ceiling).
Charge too little and you won’t make any money (the price floor).
The question is, how are you going to decide how much to charge?
Well, according to traditional marketing pricing strategy you have 3 options.
You can price based on cost, competition, or value.
If you’ve been reading my stuff for any length of time then you probably already know which way I’m leaning, so without further ado, let’s dive in!
Pricing Strategy #1: Cost
This is where you consider your product costs (and everything that goes into it) and then decide on a price to ensure that your costs are met.
When you have a cost pricing strategy your primary concern is your breakeven number, which is your price floor.
If you sell below your price floor, you will lose money.
And businesses that lose money don’t stick around for very long.
Now, I’m no accountant, so I’m going to skip laying out a bunch of formulas, but if you’re interested, here’s a link explaining breakeven better than I could ever hope to: Breakeven Formula
Cost based pricing is what many retailers and product based businesses use.
Think commodities.
If you’re selling the exact same box of crackers as the store down the road, it’s hard to justify a higher price.
That is unless… you’re adding some form of additional value (which you should be… but we’ll get to that shortly)
Pricing Strategy #2: Competition
Even worse than cost based pricing is competition based pricing.
This is because competition based pricing assumes:
1) Your competitors got their pricing strategy right 2) You’re willing to compete on price (here’s why this isn’t a good plan… The Low Price Monster
When you assume your competitors got the strategy right you’re taking a big risk.
And when you’re willing to compete on price it’s a lose-lose race to the bottom.
The fastest way to get out of a competitive pricing model is to take a look at your competitors and see where you stack up in regards to customer value.
Is there anything you do (or can do) that your customers would value more than your competitors?
Which leads us nicely to the final (and best) pricing strategy of them all…
Pricing Strategy #3: Value
In the end it’s the customer (and market) that decides whether a price is worth it or not.
If you’re making sales, then clearly the price is worth it to some consumers.
If you’re not making sales… then the value exchange (product/service in exchange for money) isn’t perceived as “worth it”.
How do you determine value?
You don’t.
Your customers determine value.
And customer perception is everything, so make sure you understand what your customers are thinking
Value based pricing is all about understanding how much value a customer assigns to your product or service.
Want to charge more?
Make it more valuable.
Want to charge less (though I don’t know why you’d want to do this…)
Make it less valuable.
Want To Make More Sales?
You can do 2 things to make more sales.
1) Improve your product or service (this is ALWAYS step 1)
2) Or, if your product or service are already outstanding, then move on to improving your marketing.
Improving your marketing will help you better align your message with the values and benefits that are most desired by your potential consumers.
In the end, it all comes down to value.
