Posts

Our prices determine our market – you are not a victim.

/in /by

Don’t kid yourself. The market doesn’t determine our prices; our prices determine our market. It’s our fault, not theirs.

There are two reasons people react to your pricing:

  1. Your prices are too high. That almost never happens. Stop thinking you’re the one exception.
  2. Your prices are too low. This is almost always the problem. When your prices are too low, you attract people who are price-shopping, and worse yet, bottom feeders, and both will spend all their energy beating you up because your prices are too high.

Everyone wants value, not everyone is willing to pay for it! There are only three kinds of buying questions:

  1. Price Buyers – How much?
  2. Value Buyers – Can you do it?
  3. Relationship Buyers – Who do I like best?

If you set low prices, you are selling to price buyers and will always hear “Your prices are too high”. If you set value-based prices and are building relationships, you’re going to make a good profit, which will let you serve your clients even better.

Pricing Mechanics – Step by Step

How not to do it – history, fear, feeling, my experience, dreams, hunger, client situation/pocket book, convenience, subjective “analysis”, or “because it’s easy for me to do” (craftperson pricing).

How to do it –

  1. Cost+ – This is the worst way to price, but absolutely essential as a starting place for knowing how to actually set your prices. You must know your costs. If you don’t you’ve got no baseline for pricing anything. You need to know your costs by each individual product/service.
  2. Markup+ – Desired profit = needed markup/margin (50% markup equals 33% margin – don’t confuse the two). Once you know your costs, add a basic profit. This is just the start.
  3. Your Differentiator – what makes you different than the next guy? If you have something, you can price in that difference. If you don’t, you’re a commodity. Don’t be a commodity.
  4. Expertise+ – are you the best in your world? If so, you can demand a premium. If not you’re a commodity.
  5. Client perception (market demand)+ – convenience, coolness, etc. No one runs to catch a stopped train. Get your train moving – get your clients chasing you.
  6. Scarcity/Competition+ – is what you do unique or is the market flooded? If your unique, you can price that in. If not, you’re a commodity.
  7. Hazardous Duty Pay+ – turn low profit, high maintenance clients into high profit, high maint., or fire them. The cost of low profit, high maintenance clients is untenable.
  8. How busy are you?+ – the 95% occupancy rule. If you are more full than 95%, raise prices. (90% manufact.)
  9. Time/complexity+ – are they asking something out of the ordinary? Don’t give ordinary pricing!
  10. History – are you stuck with past pricing? Use #1-9 + new clients to get out of it. Be courageous – raise prices!

Summary

Move from Cost-Plus to Value-Based Pricing if at all possible! Pricing to VALUE – the ultimate objective! In short, stop pricing based on what you think you’re worth and start pricing based on what the market will bear. You’ll make a lot more money and people will whine a lot less about your pricing. Be brave, you’re almost certainly not charging enough.

No Extra Charge:

The Ten Most Common Pricing Mistakes, by Per Sjofors, Managing Partner, Atenga, Inc.
Here is a list of ten of the most common mistakes companies make when pricing their products and services.

  1. Basing your prices on costs, not customers’ perceptions of value
  2. Basing your prices on “the marketplace”
  3. Attempting to achieve the same profit margin across different product lines
  4. Failing to segment their customers
  5. Holding prices at the same level for too long, ignoring changes in costs, competitive environment and in customers’ preferences
  6. Incentivizing your salespeople on revenue generated, rather than on profits
  7. Changing prices without forecasting competitors’ reactions
  8. Using insufficient resources to manage your pricing practices
  9. Failing to establish internal procedures to optimize prices
  10. Spending a disproportionate amount of time serving your least profitable customers

Revenue is Not Your Friend – Pricing For Profit

/in /by

The Sausage Vendor said he bought his sausages for a buck, and sells them for $.95. When challenged as to how he would make money, he said, “No problem, I’ll make it up in volume.”

Business owners focus on Revenue when they should be focused on Profit. If they focused on Profit, they would raise their prices more often.

(This is Part One – The Mind Games of Pricing. Next week we’ll do Part Two – The Mechanics of Pricing)

The old saw is wrong – “If you worrying about sales, profits will take care of themselves”.
Neither Revenue nor Sales are a good place to focus financially – we need to focus on profit (actually cash flow, but that’s another blog.)

What barriers do you encounter in communicating your pricing to potential clients?
Competition, market conditions, aging industry, complex service, fear, not understanding how to price? Probably a little of most of the above.

When we aren’t sold on our pricing, what does that communicate to the potential client? It communicates that all of the above (competition, market, fear, etc.) are all good reasons not to buy my product or service from me. The best way to create pricing problems is to not believe in our own pricing.

A caterer friend gave his “best, lowest” price to a potential client, skimmed of any “excess” profit, and the client’s response was “Is there any way you can go lower?”. When we aren’t confident in our prices, we mentally set up shop in a place that attracts bottom-feeders like the guy above. Getting a lot of pushback on your prices? It’s possible its because your prices are too low!

Joel Spolsky is the co-founder and CEO of Fog Creek Software, said “I often meet people at parties and conferences who are starting companies, and they will invariably ask me, “Say, Joel, do you have any advice for start-ups? Since I know next to nothing about these people or their businesses, or even their industries, I usually just say, “Yes! You should raise all your prices!”

And we both have a good laugh, bwa ha ha, then the founder ignores me. But my advice was most likely right. That’s because almost every start-up I have ever seen has set its prices too low.

Of the three business owner Profiles – Market Focused, Systems Focused, and Product Focused, the Market Focused entrepreneur is most likely to have good pricing, and the Product Focused craftsperson will have the worst. The problem – the overwhelming number of businesses are started by Product Focused craftspeople. (The Systems Focused manager loves accounting-driven pricing that ignores all market conditions; they also start the fewest businesses.)

What makes for the most profitable company? One that focuses on providing VALUE, not COST! Lower prices is not value, it is simply lower prices (and may communicate less value).

FIND VALUE OUTSIDE OF PRICE!

If relationships are equal, there are only two other buying questions – 1) How much does it cost? (price question), or 2) Can you do it? (value question). If you’re getting the “How uch does it cost?” question too often, you’re not focused on adding value or you’re not confident in the extra value you’re delivering. Either one will lose you clients much more than your pricing itself.

What does having slightly higher prices communicate to the customer? We are confident in how our product performs.

How do we get confidence?

  1. Understand the value to your clients. Ask them – why do you buy from me? What are you buying that you don’t think I even know I’m selling? It’s the best question you’ll ever ask them.
  2. Stop thinking about how YOU think you perform (internal/craftsmen view), start pricing based on how you benefit them (see #1 above.)
  3. Get some support – have somebody hold your feet to the fire on WHEN you will raise your prices.

Raising your prices is usually the fastest way to create new PROFIT. If you’re already covering all your costs, then every penny of higher prices falls directly to the bottom line. Want to make more money in less time? This is one of the best ways to do it.

Next week we’ll cover the actual mechanics of how to set and stick with a good price.