Pricing products or services is rarely scientific. So how do you ensure you don’t sell yourself short or get a reputation for being expensive? Christopher Jenkins considers your options. The most annoying thing in business is your accountants telling you how to price your product. Don’t they understand you can’t charge more than the market rate? They’re always spouting mumbo-jumbo on “cost-up pricing” and charging more for contracts which, quite frankly, we would almost pay to get. What on earth do they know about what is strategically important for our business or what our customer is prepared to pay? Pricing is probably the most talked about, most cliché-ridden subject in business. You know the sort of stuff: “If the client doesn’t question your bill, then you aren’t charging enough”, “Don’t price yourself out of the market”, “Pile it high and sell it cheap”, etc. However, it’s an area in which the least amount of science is applied – and the most amount of gut feeling. As a basic guideline, ask yourself the following questions:
Who actually makes the pricing decisions in your business?
Research by the Chartered Institute of Marketing found sales managers and marketing directors make the decision in the vast majority of cases. So the right people are involved. Not necessarily! Sales people will, by their nature, have a discount up their sleeve in order to get the sale, and if your goal is to maximise profits, this is not the answer.
Allowing the wrong person to decide the price can be costly. An employee for a client of ours sourced a product at a fraction of the market price, triumphantly rang the client and applied the standard mark-up. The result being a profit of £2,000 instead of £10,000, and the client being left suspicious
they’d been overcharged in the past. The answer is to apply science, order and thought to the pricing process.
Is your pricing policy flexible?
This shouldn’t mean giving in to your customer each time they ask you to drop your price. Again, be scientific about it. If you are a retailer try pricing differently at different times of the day to encourage customers at less busy times, avoiding the cost of extra staff.
Try out the ‘7 Series’ pricing concept. A client of ours was worried about lowering
prices during hard times. The solution was to create more than one product, which could be priced differently. In the same way, BMW created an affordable car without destroying the brand value of the 7 Series. By bringing out the cheaper 3 Series, mere mortals such as us could afford the brand while
someone who wants to spend £70,000 on a car still could too.
Do you know what your price drivers are?
Well-run businesses use pricing management to achieve business objectives. Examples of this are:
- Selling on value as opposed to price
- Segmenting the market place to be able to attack it more intelligently
- Long-term price management strategies such as “penetration pricing” or “pre-emptive pricing”
Pricing should be a key element in constructing your budgets and one of the main tools to shape your business. If it’s part of an overall strategy then you can afford to take on loss-leading opportunities for strategic reasons, test the market to its price limits and value bill regardless of the real cost of the service. If your pricing policy is haphazard, then your bottom line will be too.
Have you added value then lost it?
We have all talked about adding value, but what about ‘value lost’? An intelligent policy doesn’t just seek to extract the maximum sum, it ensures any value added is charged for. Businesses often lose 20% of their turnover by not working to a watertight brief.
Make things clear from the start. Describe exactly what you are going to do for your client and at what rate. Be clear what you are not going to do. Then if the client asks for more they can’t complain if the bill is extra.
This approach requires you to be clear, brave and rigorous. If you are, you will be paid the correct price without clients concluding you are expensive.
Pricing products or services is rarely scientific. So how do you ensure you don’t sell yourself short or get a reputation for being expensive? Christopher Jenkins considers your options.
The price is right… or is it?
Christopher Jenkins is senior partner of Wingrave Yeats. He was voted best business advisor of the year by the CBI in 2001/2.