When I talk to business owners, the subject of pricing almost always comes up. They lose sleep wondering if their prices are too high or too low. Of the four P’s of marketing, Product, Price, Place, and Promotion, setting prices is the quickest, but that does not mean its the easiest. In fact, making a mistake here can be very costly in terms of lost revenue as well as sending the wrong signal to the market about your products and services.
How do you overcome this challenge?
- Understand the role of pricing
- Understand the pitfalls
To be successful at pricing, you need to understand the difference between a product cost, its price, and its value. The cost of the product is all the direct and indirect expenses that you experience as the manufacturer to make the product. Things like raw materials and labor.
A price is a signal, a piece of information about the value. Value is what the consumer gets out of the product. The customer does not compare the cost to what they pay. Instead, they compare what they pay versus the total value they get out of it. Value based pricing is the process of calculating the total delivered value from using the product and then setting the price at or just below that amount. The price quickly tells a customer a lot about the quality and value.
Hey, what about the competition and their prices? well first look at your value proposition. If you are positioning your product as superior to the competition, make the price the same. If your product is inferior to the competition, set the price lower. Focus on value and see pricing as a way to help customers understand what your product and services are truly worth. people don’t mind paying higher prices if they get high value in return.
Pricing is without a doubt one of the top ten marketing challenges for any business. The trick is to balance financial impact with good common sense about customer expectations.