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Which product feature of yours does every buyer ask about?
Which sales tool closes prospects instantly? Your price. Yet,
despite the far-reaching consequences of a company’s
pricing, I’m surprised at how little time small business
owners spend on it. Here are a few ways to bring pricing to
the forefront of your marketing plan.
Price is a promise
Let’s say you’re shopping for cereal and come
across two varieties. One is a well-known brand in a resealable
20 oz. package, which comes with a toy and sells for $4.99.
The other is a store brand, that’s packaged in a non-descript
plastic bag and sells for $2.99. Which do you buy?
If price was your only factor, you’d buy the $2.99
brand. But there are other factors. In this example, the $4.99
box promises you the reputation of a well-known brand, a toy
to entertain your kids and the convenience of resealable packaging.
Remember that a price guarantees all the promises wrapped
up in your product or service.
Determine your promises
Before you ever touch a calculator, first take stock of all
the value factors that are bundled into your price. If your
company sells a product, these might include:
- the performance of your finished good
- your distribution capabilities or
- your service and installation services.
If yours is a service, value factors might include:
- the bottom-line impact of your deliverable
- your company’s ability to meet tight timelines.
- your experience level.
Pricing financially
After taking stock of all your value factors, grab a calculator.
First, add up all your direct costs (those incurred as a result
of delivering your service) which include labor and raw materials.
Then, add up all your indirect costs (all other costs that
aren’t direct) like rent, insurance and utilities.
Now, identify the profit your company needs to attain in
order to fuel new investment and reward your employees. Finally,
forecast what your annual unit volumes will be. Now, divide
the total of your costs and profit by annual units sold, and
you end up with a unit price. Sure, this is a simplified example,
but the process is sound. This kind of analysis will help
ascertain where your prices should be from a financial perspective.
Pricing competitively
It’s important not to stop here. Instead, gather competitive
pricing information from any of these sources:
- Intermediaries (distributors, brokers)
- Previous customers
- Prospects
- Ex-employees of your competitors
- Trade associations
After digging around enough, you’ll be able to generate
a range of prices that your competitors fall into. Together
with your financial prices, you’ll now have two reference
points.
Pricing by position
The last step is to and ask this question “How do we
want to be perceived in our market?” In my book The
Marketing Toolkit for Growing Businesses, I identify 13 possible
price strategies you could choose from, but to make this easy,
consider just three:
- Premium Price; the most expensive 1/3rd of your market
- Middle Market Prices; the middle 1/3rd
- Budget Price; the least expensive 1/3rd.
Based on the value factors you’ve identified and your
chief competitors, which of these 3 price level best matches
your product? The lesson in this exercise is that price positions
your product.
The worst pricing decision you can make
“Because we’re slow right now, we’ll lower
our prices. Then as business rebounds, we’ll raise them.”
This is a bad marketing decision because lowering your prices
immediately positions your product differently to buyers.
Plus very few companies make attendant cost reductions, so
margins erode. And when you try to raise prices again, customers
who bought at the lower prices will expect to get more value
factors for the additional price. A better strategy is to
maintain your current prices while seeking cost reductions
to maintain your margins.
Another bad pricing decision
“If I drop my price to $15, then will you buy?”
Here, you signal to a buyer that your list prices are not
final. Sensing this, buyers will negotiate harder and the
resulting price reductions will cut into your margins. Instead,
think about coupling price discounts to the buyer with equivalent
reductions in your offering. For example, you could say “OK
I can lower my price to $15, but I’ll have to reduce
our warranty period from five years to two.”
Sure, pricing is a financial decision. But it also impacts
your positioning, selling efforts and product offering. Remember
the words of Thomas Paine “What we obtain too cheap
we esteem too little; it is dearness only that gives everything
its value”.
Author Bio
Jay Lipe, aka the “Plan Man”, is the CEO of
Emerge
Marketing; a firm that helps growing companies improve
their marketing. He is the author of the book The
Marketing Toolkit for Growing Businesses (Chammerson
Press) which is available at major bookstores and online
at www.amazon.com.
He is also a sought after speaker and seminar leader, and
can be reached at (612) 824-4833 or lipe@emergemarketing.com
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