How’s everyone holding up?
I’ve been thinking about pricing a little bit the past week because I’ve had a few folks I work with ask me about setting prices, changing prices, and the best pricing method.
I’m putting together a short ebook with the principles of pricing that I follow that I’ll share here when it is ready, but I wanted to talk about the importance of pricing for a few moments this morning because as I’ve gotten back to the basics of marketing, one thing sticks out to me: I can tell how good of a marketer you are by the way you deal with setting your prices.
Let me explain:
Pricing a product or service is a bit art and a bit science.
To get to the correct price for your product or service, you have to get through two key strategic questions:
- Where will you compete?
- How will you win?
Here is Professor Roger Martin explaining:
<iframe width="560" height="315" src="https://www.youtube.com/embed/ANvU6qkPvGo" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe>
From these two foundational questions, you hit the jumping-off point of marketing. Marketing Orientation, getting the voice of the customer into the business, doing research, STP, building funnels, setting strategy.
Then you get to the 4 Ps: Product, Place, Promotion, and Price.
So back to price.
The first thing to recognize is that the price decision is the most important marketing decision you make because it is the point when you capture some of the value you’ve been creating for your customers.
When I’m looking at your price, first I’m checking to see how sophisticated your price is.
Are you using the most basic pricing method of “Cost Plus Pricing” meaning you take the price of your goods/services and add a little bit on the top for a profit margin?
It is easy, but dumb because you throw out your segmentation, don’t pay attention to your targeting, and you leave a lot of money on the table.
Have you decided to try and use some sort of dynamic pricing method with the help of technology?
This can help a lot, especially when you have some sort of product or service that is an expiring asset like a sports ticket or some sort of travel package.
You can maximize profits with dynamic pricing and you can get responsive pricing. The downsides include customer dissatisfaction and you can find yourself in a price war.
Then there is Value-Based Pricing.
There are 3 concepts to remember with Value-Based Pricing:
- COGS: Cost of Goods and Services
- ECV: True Economic Value
- Perceived Value
What do they mean?
COGS is the floor. It is just the price of what it costs to make and sell your product or service.
ECB is the total impact that someone receives from using your product or service.
Perceived Value is how your customers and prospects view your value.
Here is where I know how good you are at marketing: what is the gap between the Perceived Value and the ECV?
If you have a big gap, you need to work on your marketing.
If you have a smaller gap, you are doing a better job capturing the value of your product.
This gap tells me the core competence of your organization when it comes to marketing.
Does all of this happen by accident? Guessing? Magic?
No. Like everything good in marketing, research plays a tremendous role in the success or failure of your pricing.
There are a few ways to do this:
- Experimentation: this is where you can use technology to calculate in real-time with real customers. Amazon has done this very well.
- You can juggle the price based on supply and demand which is a form of dynamic pricing as well. Think of the Coke machine that changes pricing based on temperature.
- Trade-off analysis is very sophisticated. Think about it like A/B testing.
- The Van Westendorp Pricing Method which a 4 question survey that is the lowest-tech, but also tends to have the best mix of cost to speed to impact.
I bring this up because in too many instances folks just pull their pricing out of thin air, or worse. They may look for pamphlets or take advice from colleagues or competitors.
The reason you have to get this correct is that pricing is the most important lever in your business.
A study shows that if you are able to get 1% more in your price, your profits grow somewhere between 10.3-12.2% on average.
That’s big money!
I’ll go into some of this stuff a little more in the coming weeks, but two final notes:
- There is a natural inclination to underprice. Once you’ve set the price too low, it becomes very hard to raise the price.
- Don’t discount! Discounts are for dummies, yes. I’ve said it a lot over the years. But remember the number I gave you above for every 1% in the price you gain? Well, here’s the number on discounts: for every 1% you discount, you are costing your business around 40% in profits.
So, my takeaways this morning:
- Get your price right!
- Don’t discount!
And, when you set your prices, I’m judging you.
See you next week!