Pricing is something I really enjoy digging into. It’s the only element of the marketing mix that produces revenue. You can have an incredible product, perfect placement, and an effective promotion…. but if you price your product incorrectly then none of that matters. In my work with SMB’s,

Price often feels like an afterthought.

Imagine you had a lever that you can pull at anytime to immediately increase your profit margins. This “lever” is called price. It is easily the most powerful number that represents your product or service. Price is how you communicate to your customers what the value of your product or service is. When I talk with owners, I typically hear something along the lines of “I want our services to be affordable and cheaper than our competitor.”

I cringe when I hear this. Here’s why.

Never build a company that’s business model is to compete on price.

As soon as you decide that you are going to compete on price, you have effectively signed your own death warrant. Entering a pricing war means the following:

1) You are competing on who is willing to take the least amount of profit (shrinking profit margins)

2) You don’t think your product or service provides unique value, and only exists because it is the cheaper alternative (No UVP)

3) You attract customers that are highly price sensitive (Unloyal = raise prices and they leave)

4) Your customers are low income (unless you are a necessity good, they will abandon you when times get tough)

5) When someone undercuts your pricing, you will be forced to lower (say goodbye to the bottom line lol)

So, how do you determine your prices?

It’s an important question and one that is different for every business. Software, retail, manual labor, etc. all require different formulas to establish their pricing. There are several different pricing strategies including penetration pricing (least favorite), skimming, value based pricing (my favorite), and more. With that being said, there are some elements that remain consistent across all industries.

1) Cost: This one is obvious but it must be said. Understanding both your fixed costs and variable costs should be step one. Your business needs to make a profit.

2) Demand: How badly do consumers need your product?

3) Target Audience: Different customer segments have different willingness to pay.

4) Market Positioning: How do you want consumers to feel about your brand?

Some questions you should ask yourself when creating your pricing include:

• How do you differentiate prices between segments?

• Is dynamic pricing, where prices are continuously adjusted, right for your market?

• How do you defend against low-cost competitors?

• How do you go from a transactional to a subscription price model?

• Do customers prefer pay-per-use or flat rates?

• What do customers believe is a fair exchange of value, and what drives their decisions?

• Is it possible to charge performance-based prices?

Set your pricing with confidence.

Value-based pricing is a pricing model that captures a products perceived value. Since this pricing model can be somewhat subjective, it requires a lot of time and research (and some trial and error). Understanding how customers perceive your brand’s value is not easy, but will allow you to raise prices as your product improves. Don’t get me wrong, all pricing strategies require you to be aware of your competitors prices (even value-based). But when your pricing is dependent on being cheaper than the competition, that is when you have a problem.

Why do you pay $1 for a water bottle at the store, and $7 for a water bottle at a concert? Value-based pricing.

The data shows that:

Businesses should evaluate their pricing every 3 months, and change their pricing every 6 months.

Once again, this depends on the industry and market conditions, but generally speaking, this is a good rule of thumb. One thing that is important to know is that changing pricing does not mean raising pricing.

Changing your price could mean creating a paid add-on feature, offering a promotion, charging more for startup costs, etc.

Price changes communicate to your consumer that your price isn’t random.

You may think that changing prices will be perceived as the opposite, but that is not the case. We live in world where things are always changing. Why shouldn’t your price? Adjusting your pricing on a fixed cadence is indicative that your price has reason behind it. Your price does not need to be negatively correlated to your costs. If raising prices causes you to lose customers, then believe me when I say, you are better off without them.