Today, I’m going off on a bit of a rant.
I can’t believe how many times lately that I’ve spoken to business owners who claim that their product or service is one of the best in their field. And I believe them. I have absolutely no doubt that they are right.
But then when I ask them how they position their pricing, they tell me they choose to set their pricing level in the middle of the market range.
Why?
To be competitive.
To me, that just doesn’t make sense. If the product is one of the best in the market, it obviously has more value than the average product. Yet, if the price is about average, the perception that gives the market is that the product must be average.
If you set your price as average, you lose all the benefit of having a product that is well above average. Even if you try to sell people on why your product is one of the best, but then tell them about your average or low price, you confuse people and they will end up not believing your claims.
You see, most people actually still believe that you get what you pay for. You really need to charge what you are worth, not only so you don’t confuse your customers, but so that you maximise your opportunities for sales and profits.
My experience with clients is that fear of competition is the main reason for not wanting to charge what they think they are worth. The fear is that if they increase their prices, they will lose customers.
The reality is that people place far greater importance on the extra value they receive from your better product or higher quality service than you may think.
Have you ever thought about the value of your reliability or the additional usage customers get from your product lasting longer? Have you ever calculated the added value your customers get from your faster delivery times or your lower return rate? You need to know these numbers so that you can use them to justify your higher prices.
That’s right. Charging average prices actually makes your ability to compete worse than if you charge higher prices.
It is actually easy to command higher prices if you also communicate the reasons your prices are higher and you appropriately justify the extra expense your customer should make now, for the savings or added value they get from their investment. You see, the problem is not a competition problem, but a marketing problem.
Most business owners are great at producing their product or service, but lack skills when it comes to marketing. The reason customers query your price compared to your competitors’ is that you haven’t actually communicated the added value they will get from you. When you give customers no other criteria to compare options, they can only resort to price comparisons.
I often find clients locked into a view that their market is highly competitive and that if they increased their prices they would lose too many valuable customers. My experience is that if any customers are lost by a price increase, it is normally the ones that are the most difficult to deal with and that you are better off without anyway.
The customers that value the extra quality or service you provide have typically been wondering why your prices are so low and have actually been expecting you to put them up the the level that charges what you are worth.
In almost every market I can think of, there are always a number of player that compete on price. Yet there are also some in that same industry or trade that charge much higher prices than the norm. Correct me if I am wrong, but it seems to me that the ones that charge higher prices are also the most successful in their field. That should tell you something.
Pricing is one of the most critical elements of profitability for any business. Yet very few operate at a strategic level in this area.
If you are trying to win work or sales by pricing competitively, it could be time to rethink your approach. You are just making business and your life harder than it needs to be. It’s time to start thinking more strategically about how you can charge what you are really worth and how you can effectively justify and communicate your extra value to your market.
Believe me, the effort will be well rewarded. The difference between what you charge now and what you are really worth, is all lost profit. Shouldn’t that be in your bank account rather than your customers’?
Greg Roworth is an business consultant and author of the book, Put Your Business on Autopilot. Discover how to create, in 7 steps, a business that really works at www.businessflightpath.com.
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David Kellam Reply:
September 2nd, 2010 at 12:39 am
Both approaches are right, but looking at price alone is misleading. You should be looking at price * volume – i.e. the area under the price/volume curve. Well, you’d be looking at net profit but as that can include fixed and variable components, can be a little trickier.
At a whole-of-market level, this usually results in multiple price ‘segments’.
At a firm-specific level, you often have the choice of optimising for several price equilibria, all of which are equally (or nearly so) profitable. From a strategic perspective, maximising your points of differentiation gives you the most choices over which segment to play in. Around/within a particular segment, the same applies but you will find yourself more restricted by price sensitivities if you try to pitch between two segments (which will just confuse people).
More stories of this:
http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html
http://www.sandhill.com/opinion/daily_blog.php?id=19
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Greg Roworth Reply:
September 3rd, 2010 at 7:25 am
Great response David. It’s profit that’s important at the end of the day, not sales volume. Anyone in the SME area should leave concepts like market share to the big players. Find the sweet spot where you can maximise your profits with a price point that reflects real value and enables you to sell less, make more money and work less at the same time. You just need to work a bit harder on marketing and communicate your message to the right market. The effort is trivial compared to the payoff if you get it right.
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