With consumers price-checking your competitors on their smart phones, sometimes right in front of you, intelligent pricing is becoming increasingly important to your bottom line. How can you sell more and increase profits when dealing with today’s price-savvy consumer?
I was in the produce aisle of my local grocery store the other day looking for Romaine lettuce when I got to thinking about price and how it affects what we buy. I had a decision to make: should I purchase the organic head of lettuce at $3.99 or the non-organic at $1.69?
Now, I often go organic, but there’s a certain point where my desire for the potentially healthier alternative gets undermined by price. In this case, I couldn’t justify paying more than twice as much for the organic product.
The thing is, the extra $2.30 was not going to break the bank for me. It wasn’t, after all, a high price item like a car where paying 135 per cent more would mean I’d have to be in a whole different tax bracket!
But I just couldn’t see the value. And there, in my opinion, is the crux of the matter. No matter which books, online articles and marketing courses tell us about the various methods of pricing (and there are dozens of strategies) it all comes down to whether a buyer feels comfortable paying what you are asking.
If you’ve ever read a book or taken a course on marketing, you’ll have come across the four Ps of marketing: Place, Product, Promotion and Price. The first three often get more attention than the fourth, perhaps because setting up shop is fun, promotion is sexy and developing the product is at the heart of what you do.
But, hold on. Take a close look at the first three Ps. What do they have in common? Yes, they all cost you money! It all comes down to price. Setting the correct price is the only one of the four Ps that will generate revenue and profits; that is, of course, if you get it right.
Price it Right
I once read a business plan where the entrepreneur’s pricing strategy caught my eye. I confronted him with my opinion and told him that he was going to lose money on every item he sold. He quickly came back with, “Yes, but I’ll make it up in volume!” He meant that if he sold enough product, he could manufacture more, thus reducing the unit cost to a point where he could make a profit. Of course, this approach pre-supposed he would stay in business long enough for this to occur, something I felt was highly unlikely.
Introductory pricing, sometimes called penetration pricing can be a valid strategy, but it can backfire. At some point you will have to raise prices, changing the value proposition for customers and potentially causing a price war with competitors, which does nobody any good.
The Holy Grail of Pricing
I won’t go into all the other strategies, such as psychological pricing, feature pricing, option pricing. They all have their good and bad points.
The holy grail of pricing is to set a price that makes you a large enough profit to keep your business healthy, while making the customer feel he or she got not just a fair deal, but a good deal. When determining a fair price, consider what you are selling and how you want the value to be perceived.
For instance if you have a low-value item and try to sell it for a high price, you’ll be seen as trying to scam customers. At the opposite end of the spectrum, if you have a high-value item and try to sell it too cheaply, potential buyers will become suspicious.
Certain high-value items can carry a premium price. In these cases, the profit margin is higher than it would be for middle-of-the road items, but once again, there has to be sufficient prestige to warrant the price. Think high-end automobiles or fine restaurants.
Even low-value products can be incorrectly priced. For instance, if you visit a dollar store and see an item marked $10, you might question purchasing it regardless of whether or not the price offers fair value. Why? Because you are in a “dollar store,” your perception may be that items should be less expensive.
So perception really does play a vital role in pricing. If you build value into your product, regardless of what your competition is charging, you may be able to ask a higher price than they do. Often, value does not have to cost you much, if anything. Excellent customer service has value; additional services such as having your car washed or getting a ride home when your car is serviced add value.
Do note that niche products often demand a higher price: the more you can make your product or service unique, the higher price you can ask, especially as it makes price shopping difficult.
Adding value is the best way you can justify or increase price and it doesn’t have to cost you an arm and a leg. Value is always in the eye of the beholder. Holding a focus group with people who represent your market demographic will provide you with insight into what potential customers think your price should be: a price that represents good value, a price that will make your customers feel happy they purchased from you, and more importantly one that makes you a profit.
Price Comparison at Your Fingertips
Today, more than at any other time in history, consumers have access to information about what price almost any item is selling for, not only locally but also globally. Intelligent pricing is becoming increasingly important. Remember, this is an era where your potential customer may know more than you do about your competitor’s pricing (and what does and doesn’t represent good value) than your salespeople.
Pricing in a way that limits the ability of potential buyers to make apples-to-apples comparisons makes sense. Building value in what you sell is priceless.
Mike Wicks is an award-winning author, blogger, ghostwriter and publisher. He is president of Blue Beetle Creative Media.