Slingshots or Clubs? How to Choose the Right Pricing
By Andrew J. Birol, President, Birol Growth Consulting, Inc.
When pricing your products and services, does your business look up to larger competitors for guidance and direction? More important, like David in his battle against Goliath, are you choosing a slingshot or a club? Too often, mid- to small-sized businesses choose a club instead of a slingshot.
Here's an example: A machine shop and an advertising agency feel pressure to match the hourly rates of their largest adversaries. Invariably this is a mistake because the smaller firms' costs of production and service differ from those of larger competitors. Customers and prospects almost always choose smaller companies over larger firms for non-price factors. Owners of smaller companies can and must offer different services than larger businesses. There are countless other examples of missed profit opportunities, lost margin dollars and unnecessary pricing concessions. Invariably, the owners of smaller companies leave money on the table for three reasons:
- They don't focus on their best and highest use (See last month's column for more on this.)
- They can have low confidence in the value they provide. Smaller firms don't always respect their own products and services enough to ask their customers to pay for them
- They don't understand their own marketplace Too often, companies price their goods and services without sufficiently understanding their customers, prospects and competitors.
To ensure your business prices its products correctly, here are five rules to follow:
- Never base prices on costs. Too often, business owners link their prices to their costs. What something costs a small business is rarely related to what the market will pay. Lawyers learned this lesson long ago. They pay less costly staff to complete routine work but still bill the client at the firms standard prices
- Price products and services by their value to a customer. Remember that customers buy holes, not shovels. Restaurants do not price their meals by adding up the cost of food and service. Instead they create an experience customers will pay more for. The better the experience, the more costly the restaurant. Therefore, price your service or product by what value your customer derives from their consumption.
- Price your product to fully cover the cost of selling and servicing the customer. Too often, smaller business owners forget to include all the hours involved in developing proposals, creating trial orders or samples during the sale as well as after-the-sale-service. Your product's price must reflect the total value of selling and servicing it. Manufacturers are most susceptible to providing product consultation and not charging for it. If your customers want commodity pricing, find better customers or make your consultative services an invaluable necessity.
- Only compete on price when the customer and the opportunity are right. If a special opportunity offers your business a chance to pick up new skills, publicity or economies, you can price more aggressively. But many customers are never worth the price they cost, particularly those that require (and dont value) additional services or extraordinary responses from your company. Just ask Firestone about selling to Ford.
- Price your products and services differently to prospects, reordering customers and multi-buyers. When attracting new customers, create trial size or simple, low-risk products and services designed to attract a skeptical buyer. Price these aggressively to close new business fast. Price re-orderable products and services for maximum profitability, as these are the backbone of your company's earnings. If you add customer value through more information and service and simple reordering processes, customers will be pleased and so will your accountant. New products and services sold to existing customers provide additional sales to your customer base and can be priced at levels in between those new sales to prospects and reorders to customers. Customers will pay more for your innovation and value than prospects, but your new offers won't be as profitable as your reorders until your experience in selling the new items grows.
Just as David's slingshot ultimately felled Goliath, your pricing weapons can have the same impact in your marketplace. The key is to stop trying to use pricing clubs and start learning how to use your slingshots. Remember, pricing your products and services correctly is proof that your company understands its marketplace. If your pricing neither loses you business or leaves money on the table, you are winning the fight.
Articles by Birol Growth Consulting are © copyrighted and all rights are reserved. However, articles may be reprinted with prior written consent if attribution is included as follows:
© Copyrighted by Andrew J. Birol, President of Birol Growth Consulting, who helps owners grow their businesses by growing their Best and Highest Use ®. Andy can be reached at (412) 973-2080, by email at firstname.lastname@example.org, or on the web at www.andybirol.com.