Price Your Value, Not Your Time
Setting the right price is more than a calculation of costs plus profit. It is a strategic statement about where you stand in the market and who you intend to serve. When you set a price, you are not just asking for money. You are declaring the value of your expertise and the quality of the transformation you provide. Businesses that compete solely on being the cheapest often find themselves in a race to the bottom where nobody wins.
Executive Summary: Pricing As A Value Signal
The price of your product or service tells your customers what to expect in terms of quality and value before they even buy the item. In a crowded marketplace, your pricing strategy serves as a filter that attracts your ideal clients and repels those who do not value your work. In most people's minds, low-priced products indicate either a bargain or low quality while a higher price often indicates superior value. For example, people have much higher respect and admiration for the high-priced Ritz Carlton Hotel than they do for a Days Inn or Motel 6. The Ritz has actually used its high price as a specific marketing technique to attract an exclusive clientele.
Background: The Commodity Trap
Most companies fall into the trap of cost plus pricing. They calculate their expenses, add a modest margin, and hope for the best. This approach is dangerous because it ignores the perspective of the buyer. If your price is too low, potential clients may suspect your quality is inferior. If it is too high without a corresponding level of perceived value, you will lose the sale. Historically, businesses that fail to study their competitors often find themselves misaligned with the market, either leaving money on the table or pricing themselves out of consideration.
However, while quality or a similar key benefit is important, you must always be ready to shift your prices. Customers can be very fickle. If a comparable or less expensive product with similar capabilities arrives on the scene, you must be ready to adjust. To hang onto your customers, you may be forced to match the new pricing realities.
Analysis: Marketplace Perception and Share
Your Pricing Floor: Know exactly what it costs to make your product or deliver your service. Leave no stone unturned. Factor in all the critical costs such as raw materials, equipment, shipping, staffing and even overtime. Take pains to be as precise as you can.
Your Profit Rate: Once your costs have become crystal clear, determine your desired profit rate. For example, do you want a 5%, 10% or 15% rate of return?
Your Competition: As much as possible, you should discern how your competitors set their prices and what share of the market they control. If most people perceive your product or service as a commodity, then your pricing plan must take that into consideration. As a rule, commodity items have much less pricing flexibility. If buyers believe that any of your competitors can perform equally well, then your price must also be comparable.
Your Marketing Costs: Think about how you will market your product or service. You must price your product high enough to absorb all related marketing expenses. If your product or service requires extensive advertising, the price structure must take this into account.
Recommendations: Hidden Pricing Considerations
For Price Superiority: If you have chosen to use price superiority as your driving force, then you must offer unbeatable prices at all times. But be careful not to price yourself so low that you are hardly turning a profit. It boils down to knowing how to keep the costs of your operations low enough to provide an acceptable profit margin. Many small businesses make a critical error by over-burdening themselves with too much overhead. Some naive start-ups actually end up selling their product or service below true cost.
For Pricing A Service: Pricing a service follows a few different procedures because the variables are less tangible. Fee-based services in particular are often drastically underpriced because it is so hard to know precisely what those services cost, or what people are willing to pay. For example, a skilled technician may base fees on how long it actually takes him or her to complete a task. This is not wise because it fails to consider how long it might take the client to do it themselves or how long an "average" technician might need. If it would take a less skilled person two or three times longer, then a great deal of money is being left on the table. Valuable service is being given away.
Overhead Allowance: Another mistake many service providers make is not allowing for overhead costs such as your original training, employees, rent, utilities, and travel time when determining fees. Set monthly, weekly and even daily billing goals to avoid underpricing your service. Know exactly how many billing hours it takes to reach your desired profit margin.
Key Take Away: Maximizing Revenue
To optimize your pricing for maximum revenue and brand authority, implement these shifts:
Stop Defending and Start Declaring: Instead of justifying why you cost more, demonstrate why your solution is the most effective. Focus on the cost of the problem you solve rather than the hours you work. List five ways your service provides a better result than the industry average. Use these points to rewrite your sales copy
Audit Your Competition: Identify and mystrery shop the top three players in your competitive arena. Document their pricing structures and what they include in their base packages. If you are better than the market leader, your price should reflect that reality.
Bundle For Value: Increase your average transaction value by bundling services. This makes it harder for clients to compare your prices directly against a competitor's itemized menu.
Use Premium Anchors: Offer a high end package that makes your standard offering look like a logical and affordable choice. Select one specific service or product and increase the price by 10% to 15%. Monitor the conversion rate and client quality to see if the higher price improves your lead flow.
Consider The Rules Of Price Rounding: Once you have determined your most desirable pricing range, you must begin testing prices for optimal impact. It has long been known that some pricing formats get a far better response than others. Soft sounds such as “f” are more readily accepted than hard sounds such as “t.” So as you work through the testing process, keep the following natural human preferences in mind.
Under $10 - Use endings in 4, 5 or 9.
$10-$25 - Use endings in .95
$25-$50 - Generally use whole dollar amounts ending in 5, 7 or 9, but .50, .75 and .95 are also okay.
$50-$100 - Use whole dollars ending in 5, 7 or 9.
$100-$1000 - Use whole dollars endings in 5, 9 or 95. Avoid pennies.
Over $1000 - Use endings in 100, 300, 395, 500, 595, 700, 795, 900 or 995.
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