I was speaking with a small business client and asked how they had established their price points. They responded that they put some projects out on Craigslist similar to the work they would do and received several quotes. They determined that was the market price so they set their prices slightly lower than those of the responders since they were a new player in the market. Unfortunately, many small businesses use this approach when setting their own prices. Although this may give you some guidance on price points that are being charged by some other people in the market, it is absolutely not a price strategy. Pricing is a strategic lever which many businesses – especially small business startups - overlook when defining the “4 P’s” for their business.
Pricing mistakes occur in every business, but there are several common pricing mistakes that you must avoid to be successful. Check out the summary below:
1. Thinking you have a Pricing Strategy when you really just have a bunch of Price Points.
A Price Strategy is one of the most critical weapons in your “revenue growth” arsenal. Your price strategy is a tool which will help you to grow your business. By adopting a real price strategy, you can migrate customers along the product continuum in a defined way to provide you with true organic growth in line with the customer life cycle while pricing your products and services in line with the value provided.
If you think that your “bunch of price points” is a price strategy, you may end up with some short term wins, but you will not be growing your business (top line and bottom line) over time. You will constantly be chasing the market instead of leading the market.
2. Not Understanding your TRUE Value Proposition
All businesses believe they have Value…if they didn’t they wouldn’t have started the business, right? However, many businesses develop their Value proposition from their own perspective instead of from the perspective of their Customer. Have you ever asked your customer what they see as your Value Proposition? You may be thinking that you could never do that. Let me tell you, I have and it is enlightening!
Why are your customers using your Services and Products? Ask them…their answer may surprise you. By asking you will begin to understand the real value you bring to the table. You can then use that insight to design an appropriate Value Based Price Strategy.
3. Not Understanding your target Customer
Beyond the value prop, another critical component of a solid price strategy is an identification of your target customer. Too many businesses, especially businesses just starting out try to be all things to all people. That may feel productive at first as they may be doing a lot, but in the long run it just creates confusion and will ultimately drain you and your business. (Yes, I am guilty of this one myself!) Always start with a thorough understanding of your target customer and design a price strategy which accounts for the full customer lifecycle! Remember once you understand who your target customer is, you can establish a price strategy which will guide them through the value chain for your business while providing value to them!
4. Focus only on achieving a markup over your Costs
Setting your costs based on a “cost plus” strategy may help to ensure that you are covering your base costs and allow you to achieve some level of profitability, but it could put you in a situation where you are missing out on optimizing your profits. If your price strategy is purely a “cost plus” strategy, know that you are also at risk of missing “hidden costs”. Do you customize any of your solutions? If so, how have you accounted for the cost of customization – including the “cost” of time - in your pricing. If this is your primary pricing methodology, you need to ensure that the margin is high enough to account for potentially overlooked or “hidden costs” – something that could price you out of the market.
Remember a sound Value Based price strategy does take costs into account while evaluating price points, but it does not use “cost plus” exclusively.
5. Pricing based on the Competition
This is the scenario detailed in the opening paragraph. Observing the competition and other market forces is an important component of designing a solid price strategy, however, it should not be the exclusive method for establishing your prices. Be sure that when performing this analysis that you are appropriately assessing ALL of your competition - not just the low cost providers. Remember, a customer who is just looking for the lowest price will typically not be a loyal customer and will be willing to go to the next lowest cost provider when they have the chance.
The superior strategy is to price based on the Value you provide as determined by your market analysis.
6. Being too quick to discount
I call this “the flinch”. If you have done this know that you are in good company as most businesses make this mistake. If you do not have a comprehensive price strategy you will tend to “flinch first” when challenged on your quote. I have found that many businesses will almost apologize as they are sharing their price quote instead of pricing with conviction. This will always put you in a position of weakness and will also negatively impact your earnings and the perception of your value.
If you have a real price strategy, you can be confident in your pricing which will positively impact your business.
7. A one size fits all strategy
Finally, remember that just as you have a unique value proposition that defines your business in the marketplace, your customers are unique too. Every customer is not the same and every customer need is not the same, so your price strategy should reflect those differences. Consider a bottle of water…generally a commodity, yet a customer at an amusement park will spend $5.00 for that one bottle while the customer at the convenience store will only pay $2.00 and the grocery shopping customer will only be willing to pay $3.00 for the whole case. Knowing the use case and related value that your customers associate with your products and services will drive your success!
How do you set your prices? Do you have a real price strategy? Which of these mistakes have you made? Which of these mistakes are you still making? Contact Alfieri Financial Group and let us help evaluate and design a Price Strategy that is right for your business.