Among the most expensive mistakes you can make as a small business owner is to get the price point wrong for the products and services you sell, or not to communicate the value of your offering in a way that customers are happy to pay your price.
As author Katharine Paine puts it: “The moment you make a mistake in pricing, you’re eating into your reputation or your profits.”
On the other hand, mastering pricing strategy and effectively communicating your value proposition can help you build a sustainable business that maintains good profit margins, even in a world of fierce competition and relentless commoditisation.
Here are a few ways any business can sharpen its competitive edge by improving its pricing decisions.
Many businesses allow their pricing to be dictated by external factors such as competitor activity, fuel prices or seasonal activities. While all these elements will influence your business, you can also take a longer-term, more proactive view on how you will price your products and services over time.
Begin by defining your price based on factors such as input costs, customer price sensitivity and the strength of your value proposition. Then think about how you will position and maintain your price over time as your product, industry and customers’ needs evolve. Also, consider how to constantly communicate the value you offer to your customers.
Pricing is about consumer psychology and understanding the irrational ways in which people make decisions
From video streaming services to online accounting solutions and gym membership, offering customers access to a service or product on a monthly subscription is a proven business model. Think about whether there is any element of your business that lends itself to a subscription, preferably a scenario where customers using more of it will not add to your costs.
This approach allows you to build a stream of predictable revenues, while giving customers value for money and predictability in the cost they will pay.
Think carefully about the products and services you offer and how they are positioned relative to one another. Create logical steps in pricing and value that make it intuitive for consumers to want to trade up until they hit the maximum price they are willing and able to pay.
For example, not everyone can afford the flagship model in the BMW or Audi product ranges, but each manufacturer offers features and prices aimed at getting a higher transaction value for each deal.
A pricing architecture could also make allowance for continuous improvement to the top-tier product, while high-end features and technology trickles down to lower tier products, reinforcing value and supporting price increases over time. This is one reason Apple has kept pricing relatively stable for its devices, while most Android manufacturers are under relentless pricing pressure.
Depending on what you’re selling, putting together bundles can be a great pricing strategy
Pricing is about consumer psychology and understanding the irrational ways in which people make decisions. One example is how reframing a price by contrasting it with another can get a consumer to go for the option you prefer. Restaurants often use this trick: they know many people will opt for the second most expensive bottle of wine if there is a massive price gap between it and the most expensive. Of course, the profit margin on second-best will still be very good.
When The Economist a few years ago offered subscribers the choice of an annual online subscription for $59 or a one-year print and online subscription for $125, 68% chose the cheaper online subscription. However, after it added a third option of a print-only subscription for $125, 84% chose the online-print combo deal because it seemed like good value by comparison.
Depending on what you’re selling, putting together bundles can be a great pricing strategy. An obvious example is a fast food shop that offers a burger meal, including:
Such bundles serve multiple purposes:
1. They create a perception of value for money for the mass customer with the most typical needs or tastes.
2. They anchor prices for a la carte products for customers with more niche tastes or specialist needs.
3. They increase the transaction size without necessarily increasing your company’s costs by much.
A la carte pricing can give context to the bundled deal and provide upselling opportunities for customers who want something different to a standard bundle.
Communicating a price increase to a customer is one of the trickiest elements in pricing. If you are not transparent, customers will feel cheated and become hostile. If you are too direct, they will start focusing on the cost rather than the value or the utility of the offering you provide. Some best practice approaches to communicating a new price:
1. Focus your communication on the new price rather than the old.
2. Reinforce the value you are delivering, especially if you have, over time, made popular changes and additions to the product you are selling.
3. Announce a price increase slightly before it takes effect to decouple the new price from the customer’s purchasing decision.
4. If your market is price sensitive, look at the possibility of downgrading package sizes or features to keep the price constant.
5. Find ways to add value without increasing your cost – for example, upsize container sizes as you increase prices. This works well if you are selling a cheap commodity (think machine soda and popcorn in a cinema) where a slightly bigger portion won’t add much to your cost.