Pricing Strategies..... #28
- Adrian Dionisio - business737 owner
- Aug 8, 2021
- 10 min read
Updated: Nov 29, 2024
In a world, where most businesses compete on price, it is natural for owners to be worried about their pricing strategies. Many owners are do not want to increase their prices because they are worried it will turn potential clients away, and that they will lose current clients. However, pricing yourself too low can serious repercussions on cash flow, revenues, profits and of course business growth.
When you increase your price, you will not lose customers. Prospects who only want the cheapest deal are unlikely to be profitable clients. They will always be tempted by the offers of short lived competitors who try to under-price everyone.
The natural default is for small business owners to compete on price
Q: Why do most business owners feel the need to compete on price?
A: It is because the majority of customers naturally default to price when making purchasing decisions.
Q: Why do so many customers naturally default to price when making purchasing decisions?
A: It is because of the marketing and advertising we see all around us every single day. It is all the same, with everyone making the same claims. Have you heard any of the following?
“We have the best price, best service, family owned and operated, best value, convenient hours, in business for 30 years and so on”
Sound familiar? This is the template for most advertising we see. Everyone says exactly the same thing, so price becomes the only thing that is visibly different. Price is one of the only clear options to differentiate.
Q; With everyone making identical claims how can the customer differentiate one business from the other?
A: The customer cannot. All small businesses competing with each other say the same thing, so the customer has little option but to choose on price.
As a result, the business owner feels they have little choice but to also compete on price. This is why owners are especially fearful to increase their prices.
Everyone wants the best deal
We all want the best deal when we buy something. It’s natural. How can we know what is the best deal available when everyone is offering the same thing, in the same way?
With everyone using the same common clichés it is next to impossible to distinguish one business from the other. It makes us distrust and not believe the communications because we have seen and heard it all before. It is impossible to research all the competing businesses in any space therefore we often default to price.
This is why is so important to communicate the true value of your business (read about value here). This is where effective marketing will make the world of difference to your lead generation and conversions (read more about marketing principles). When you properly educate and inform you prospect why you are the logical, best and only choice, price will not be an issue.
Do not compete on price. Compete on value
"Value is everything that your customer is willing to pay for"
Value is a measure of the benefit of a good or service. The purpose of a business is to create value and then to sell or trade it to customers, while capturing some of that value as profit. It is quite straightforward but it is an essential concept to understand. Below are the principal values people consider when making purchasing decisions.
Efficacy: How well does it work, usefulness and capability to produce the desired result.
Speed: How soon does it work, how long will you have to wait?
Reliability: Can you depend on it to do what you want?
Ease of use: How much efforts does it require?
Flexibility: How many things does it do?
Status how does this affect the way others perceive you?
Aesthetic appeal How attractive or pleasing is it?
Emotion: How does it make me feel?
Cost: How much do I have to give up to get it?
Offer one or more of these values in a way that is "better" than anyone else. Develop these to make them your strengths so you will be the best of the best. Make your business stand out from the others. Remember, all your marketing activities need to be communicating and proving the value you can offer.
Pricing needs to match your target market
There are numerous ways to create value, so how do you decide which type to pursue? As ever we must refer back to our customer. We must know and understand our customers and the market(s) we are targeting. With this in mind you can offer things that will be useful and desirable to them.
Know what particular type of customer you want to attract. Know the wants and desires of this type of customer. Know how your particular niche or market functions. Your target market will help guide your pricing strategy.
By understanding your customer and market, you can offer what is specifically valuable to them. The more value you can offer the more customers you will attract. Implementing this strategy will see the business grow and become more profitable. Remember the perfect option does not exist so people have to choose the next best scenario. Understand the customer you are aiming for and offer them what they want. Then price accordingly. The more value you offer, the more you can charge.
Calculate your profit margins to guide price
Profit Margin is the difference between what a business makes minus the costs, expressed as a percentage. Ideally a business will want their profit margin to be as high as possible. The higher the profit margin, the stronger the business.
A business sells their product for £80
The associated product costs and expenses amount to £40
So the profit margin if a very healthy 50%
(80 - 40 ) / 80 = 0.5 x 100% = 50% Profit Margin
Profit Margin is important because it shows the general health of a business. It gauges the degree to which a company or a business activity makes money. It is very simple to calculate profit margin and very important for any business to be aware of their profit margins when it comes to decision making, strategies and planning. It is very important when setting your price.
A good margin will vary considerably by industry and size of business, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered good. Personally, I would recommend to get it to at least 50%. That is my advice. If adjustments have to be made, make it the value offered to the customer, as we have already discussed.
Be the best, so the price you charge is not an issue
Payment and Pricing Strategy Examples
Before taking on a client always state your pricing and price structure. You can use questionnaires to pre-qualify potential candidates to make sure they have the capacity to pay.
Here we use the example of £10 000 per month fees. It is advisable to introduce an upfront £2500 (25%) deposit which is non-refundable after 17 days. This will be added to the clients account when they continue”
Strategy 1: Scaled pricing model
Scaled pricing will keep the lifetime value of the client. Don’t decrease your price BUT scale the price so you do not destroy the lifetime value of the client.
This scaled pricing model will also allow the client to see how effective you are.
If the client is debating price, you can tell them how you will increase their revenues and profits by putting the right strategies and processes in place. Make them the following offer to get the ball rolling and help them to get “back on your feet”.
Month 1 £2000
Month 2 £4000
Month 3 £8000
Month 4 £10, 000
This way you still have a £120, 000 per year client but you have sold them at £2000 per month. This is a very powerful way to resolve pricing issues
Do what it takes to secure the client via this pricing strategy but do not lose the life time value of the client but dismissing your £10 000 per month figure. Work your way up to this figure. You can down sell and start low but always work your way up to the £10 000 per month.
Remember you are doing the client a favour and you will be generating your own fees with the extra revenue you will be generating for your client.
Strategy 2 Contingency agreement
Establish a contingency agreement with the client so you can make something off the back end. After they have a certain increase in revenue you can take a percentage. Alternatively, after they reach certain milestones, you can agree to take something off the back end.
Check the client revenues and establish your fees (remember do revenue and not profit because profit can easily be manipulated). For example;
Client revenues are 1 million.
You start-up fees are £25,000
Your Monthly fee £10 000 per month.
You can agree to waiver the start-up fee but when then reach
1.2 mil you get 5k
1.4 mil you get 5k
1.6 mil you get 5k
1.8 mil you get 5k
2 mil you get 5k
You inform your client that you are wavering the 25k start-up fee, but that is built into certain contingency plans as you hit certain milestones.
This will make your clients feel very confident that you will help them and deliver. This will really reassure them to a great extent, that you believe in your own ability and in their business.
Alternative Pricing Models
You can use different models for different situations, to suit the needs of your client. There’s no single ‘right way’ to price so look for what suits best. Use two or three different methods if needs be, such as;
Hourly Pricing
Project based pricing
Monthly or Retainer Pricing
Package /Bundle Pricing
Performance Based Pricing
Equity Pricing
Cost Plus Pricing
When determining how to best price your products and services always take into account how you position your business. Are you low-cost, luxury or somewhere in the middle? This will help align your strategy. Naturally you must also consider your costs and expenses in the pricing strategy. Research what is common place so you have an idea what exactly is happening. This does not mean you need to mimic what everyone else is doing, but you have to know your market. Pricing also needs to reflect your goals; you need to be clear about what exactly you want to achieve. Are you focused on short-term or long-term goals? Profit maximisation or other objectives? This will influence your choice of pricing model.
How to deal with Price Objection
All your marketing should be constantly communicating that your price is more than fair and your product / service is worth the price. More often than not there is some other reason why the prospect is hesitating. Always try to smoke out the real objection by asking questions.
You need to reduce the anxiety of the person buying from you. They need to be assured. You need to establish in the prospect’s mind the fact that they are safe in dealing with you. Make it clear and obvious that they won’t lose money or face by doing business with you, BUT they will lose if they don’t buy from you. The fear of loss is greater than the desire for gain.
“It’s unwise to pay too little. When you pay too much, you lose a little money that is all. When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing what it was bought to do. The common law of Business prohibits paying a little and getting a lot. It can’t be done”. John Ruskin
Ask your client if there are really interested in the price or is it the cost that they are really concerned with? Look at the following example.
Alan needed professional Marketing help to generate more leads. He narrowed his search down to Agency A and Agency B.
He was impressed with Agency A. Their price was £10, 000 for a Marketing Project suited to him.
Alan chose Agency B who charged £5000 for something ‘similar’.
Alan paid £5000 but the cost was constant worry, stress, lost time and wasted energies. The cost was also significant because of the potential lost revenue and profit if they had gone with company A.
I want to get the best buy for my money, so do you and so does the customer. We are no different. Price is a one-time thing; cost is something you are concerned with as long as you have the product or service. It can go on for ever. Many businesses can beat you on price, however when it comes to cost who wins the battle? You do!
Buying is emotional and there always involves self-questioning and doubt, so be aware of this when dealing with your customer. Very often people will automatically say the price is too high , whether they feel that way or not. They will always try to get a better bang for their buck and try to negotiate for a better price. Your response can be as follows;
“Would you agree that a product / service is worth what it can do for you and not what you have to pay for it? With this in mind let’s take a look at what our product / service can do for you”.
Even before any objection, it is advisable to explain how you had to make an important decision with your business from day 1.
The choice was whether to do things as cheaply as possible or building quality, value and excellence throughout.
With that decision in mind, you the owner put yourself in the shoes of your customer. You felt the customer would prefer doing business with a company that spares no expense in being the best to serve the needs of their client. Something they can depend on over the long haul. Most people understand that good things are not cheap, and cheap things are not good.
We decided that it would be easier to explain price one time than it would be to apologize for quality forever. People forget price but they’ll never forget poor quality or a poor choice
Do not under price yourself. Know your worth and aim high
“Whatever strategy one follows the principles always remain true. Recognise and develop the value offered and understand what the customer values. The more value you offer the more successful you will become”.
The European institute of purchasing reported that typically at least 30% of buyers will only ever buy on price, that’s how they are and how they are motivated and rewarded. To build relationships with these people is a waste of time. Instead focus of the remaining 70%.
With increasing choice and options people are understanding the concept of value. Whilst the buying side has become more sophisticated than the supplying side is lagging behind because the supplier has not realised this yet. Don't let your business be one of these suppliers who will be left behind.
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