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:
- Your prices are too high. That almost never happens. Stop thinking you’re the one exception.
- 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:
- Price Buyers – How much?
- Value Buyers – Can you do it?
- 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 –
- 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.
- 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.
- 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.
- Expertise+ – are you the best in your world? If so, you can demand a premium. If not you’re a commodity.
- Client perception (market demand)+ – convenience, coolness, etc. No one runs to catch a stopped train. Get your train moving – get your clients chasing you.
- 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.
- 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.
- How busy are you?+ – the 95% occupancy rule. If you are more full than 95%, raise prices. (90% manufact.)
- Time/complexity+ – are they asking something out of the ordinary? Don’t give ordinary pricing!
- History – are you stuck with past pricing? Use #1-9 + new clients to get out of it. Be courageous – raise prices!
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.
- Basing your prices on costs, not customers’ perceptions of value
- Basing your prices on “the marketplace”
- Attempting to achieve the same profit margin across different product lines
- Failing to segment their customers
- Holding prices at the same level for too long, ignoring changes in costs, competitive environment and in customers’ preferences
- Incentivizing your salespeople on revenue generated, rather than on profits
- Changing prices without forecasting competitors’ reactions
- Using insufficient resources to manage your pricing practices
- Failing to establish internal procedures to optimize prices
- Spending a disproportionate amount of time serving your least profitable customers