I help entrepreneurs leapfrog over the typical potholes that derail most small businesses with inspiration, motivation, education, and support across a wide range of business topics drawn from over a decade of running my own business, teaching entrepreneurship for the City of New York, and coaching and consulting privately with dozens of women and minority small business owners. Honestly, why go it alone when help is an email away?
Is the Price Right?
Do you remember the first time you had to set a price for your products or services? The first time you had to share that price with potential customers?
I do. I sweated over the price and then ended up negotiating that price down to make the sale.
While I was thrilled on the one hand, I was also disappointed. Was that what business was going to be, a constant compromise of my value?
It took me a couple of years to realize that my price was not the problem. My target audience was.
In any case, since then I've figured out quite a lot about pricing, too much to put into one email, so this will be a two-parter (apologies in advance for that).
This week, I'm focusing on pricing models.
Simply put, a pricing model is the strategy or method used to establish the best pricing for your products or services.
Here's a short list of some of the most common pricing models employed today:
- Competitive or Market
Prices are set in accordance with what others charge for the same or similar products or services.
Many types of businesses utilize this model, watching their competition closely to ensure they don't gain the upper hand by charging less.
I rarely ever recommend this as a viable strategy for small businesses. Especially if you're in a crowded market, have larger-sized competitors, or compete with businesses who offer more product, service, or customer diversity.
The first question I ask companies who are pricing based on the market or competition is: How do you know that pricing strategy is really working for your competition? The second question I ask them is: How well does that price reflect the true value of what you deliver? - Penetration
Prices are set below market or competitive prices to attract customers. After a period of time or enough sales have been made, prices are then raised to meet or exceed the competition.
If done successfully, a company has penetrated the market by luring a portion of their competition's customers with the initial low price and keeping those customers once the price increases.
Many small businesses will charge less than the competition for a variety of reasons, often believing they're capture customers this way. Unfortunately, they don't have a workable strategy for increasing prices without alienating their customer-base or severely jeopardizing their ability to stay in business. - Sandwich
Pricing is tiered with a low, middle, and high option and audiences are primed to select the 'ideal' middle option.
This pricing strategy is based on two pyschological principles: Most people look for the best deal, which usually excludes the high tier option. And, most people don't like to think of themselves as 'cheap,' which excludes the low tier option.
You'll also see many businesses practicing what I call 'value stacking.' What I mean by this is that they're loading up that middle tier with a lot more value than the low-priced option and/or offering only slightly more value with the high-priced option. As a result, customers see the middle tier as the best deal for their dollars. - Cost-Plus
Pricing is based on a formula: Take the unit cost of what you sell (what it takes to make, package and deliver your products or services per item or offer), add a portion of your operating expenses (or overhead), and add some profit on top of that.
It sounds kind of simple and like the easiest approach, but here's where a lot of businesses get into trouble; they don't really understand their real operating costs or overhead, especially if they're doing a lot of the work themselves, and they don't really know how much profit margin they need to include.
Ultimately, this model is best used for products or services that are high volume in nature. In general, unless you're selling a lot of something, it'll be hard to earn enough overall profit to keep your business going and growing. - Premium
Pricing is higher than the majority of competitors, in line with the higher end of the marketplace.
The challenge of premium pricing is in understanding what connotes luxury or premium to your audience and in comparison with low and mid-range priced alternatives, not to mention other premium options.
In other words, what's your target market willing to pay more for and what additional costs does that entail for your business. A lot of entrepreneurs employing premium pricing without real success often miss one or the other of those two pieces of the puzzle. - Value
Pricing is based on what your customers are willing to pay.
While this may sound risky, the beauty of value pricing is that you are the one who's positioning the value of what you sell. You're doing this with your branding, your messaging, your sales strategy. In fact, there is almost no aspect of your business that isn't in some way involved in establishing your value.
Where value pricing goes wrong is when you don't really understand how all the things you're doing, all the elements of your business model, are setting, communicating, and demonstrating your value and so you leave it to your customers to dictate your value based on what they think they should pay.
You may have noticed, this is exactly what happened to me when I made my first sale (and several thereafter). Because I had targeted the wrong audience, I'd automatically devalued my services without even knowing it.
By now, I hope you get how all the aspects of your business model, especially the ones I've delved into over the past few weeks (Revenue Models, Cost Structures, and Channels) work together to support a successful pricing strategy.
Everything is connected or perhaps, more accurately, intertwined.
If you need help figuring it all out, I hope you'll allow me to help you. You're always welcome to schedule a complimentary call.
Until next week, don’t just wish you could charge more, do the work to make your audience happy to pay what you wish to charge.
Your success is our strategy!
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Easily Said & Done
I help entrepreneurs leapfrog over the typical potholes that derail most small businesses with inspiration, motivation, education, and support across a wide range of business topics drawn from over a decade of running my own business, teaching entrepreneurship for the City of New York, and coaching and consulting privately with dozens of women and minority small business owners. Honestly, why go it alone when help is an email away?
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