The 7 Commandments of Pricing

By Andrew J. Birol, President, Birol Growth Consulting, Inc.

Elizabeth Taylor, who was one of the world's most desired women, readily admitted the limitations of her good looks. She would say, “After the first thirty seconds, I am on the same level as any other woman.” Whether or not anyone else believed that was besides the point. She did. Despite decades of adulation on stage and in front of cameras, she was saying, each exchange is a new opportunity to excel—or fall flat on one's face!

No matter how long they have been in business or how many big customers they have closed, business owners experience a similar jangling of nerves when they give a price to a customer. This is the moment of decision, after all, when all of the marketing and prospecting and needs assessing converge into a single moment.

And the spotlight is shining right at your face.

So, you speak your line. You give the price. The tingling anticipation you feel will lift into elation or collapse into a pit in your stomach. It all depends on what the prospect says next.

Here are three scenarios:

  • Your prospect immediately says no, stands, and walks away. Pit in your stomach
  • Your prospect immediately says yes, shakes your hand enthusiastically, and offers to buy you a bottle of champagne. Pit in your stomach
  • Your prospect is silent, contemplating the offer. Finally, he or she nods. You hear that magical word: Yes! Pure joy!

In two of the three situations you have closed the deal, but only in the third does your instinct tell you that you've done it right. Why?

  • If the prospect rejects the offer out of hand, you have failed to sell the benefits of what your company provides. Without a clear sense of the value, the prospect assumes the price is too high.
  • If the prospect takes the offer immediately, you have given away too much value for too low a price, and the prospect knows it. If the deal is too good for your customer, it's not good for your business.
  • If the prospect deliberates and then says yes, the joy you feel is well-deserved. The prospect is fully aware of the value your business can provide, and your price accurately reflects that value.

Unfortunately, too many business owners don't know enough about pricing, so they either lose business or sacrifice profits. Here are seven commandments you can price by:

Commandment #1: Sell Them on Your Value That Resolves Their Pain or Helps Them Reach Their Opportunity

Make your prospects and customers comfortable with what they are buying. Explain the features and benefits and capabilities of your products and services, but sell customers on advantages and outcomes. This requires you to know a lot about your customers' business objectives and the ways your products and services either resolve their pain or create opportunities for them. Once they understand the positive outcomes they will experience from consuming your products and services, they will be willing to consider your price for the value it represents.

Commandment #2: Cover Your Opportunity Cost

This goes beyond just what it costs to make a widget. Your energy, education, and the opportunity cost—what you could be doing with your time and money elsewhere—must be factored in. Sure, you can discount to develop a customer or sign a marquee client, but you and the customer should agree on just what you are getting in return. A big-name client, for example, may give you a nice return on your investment by acting as a reference for your firm—but only if the client agrees to do this before you slash your margin to gain his business.

Commandment #3: Differentiate Transactions from Relationship Sales

You know your business is primarily transactional when you must continually re-sell your offer, even to customers who have purchased from you in the past. In this case, loyalty simply does not drive customer behavior in your market. You must be fully compensated for every sale.

Your business is relationship-oriented when loyalty is important to you and to your customers. This gives you more flexibility in your pricing since your compensation is stretched over the life of the relationship. For example, you might lower your cost initially to gain new customers, then increase your prices (and margins) as their reliance on your company grows.

Commandment #4: Differentiate Events from Anniversaries

An event sale is one that has no guarantee of being repeated, so your price must cover all your costs and provide enough profit, per transaction, to sustain your business. For example, if you sell and install furnaces to homeowners your customers will only need you every 15, 20, or 30 years. Breaking even on each sale is a surefire way to break your business.

An anniversary sale is one that will be repeated at predictable intervals. Your primary concern should be to meet your customers' expectations consistently so that their repeat purchases are essentially “no-brainers.” Your price must fall within market guidelines, of course, but it should reflect the value of the time your customers save by not having to seek out another supplier. An HVAC service company conducting routine checks and maintenance, a distributor of components to a manufacturer with steady contracts, and a landscaper who does seasonal planting, trimming, mowing, and leaf removal are all examples of anniversary-driven sales.

Commandment #5: Price for Conversions, Reorders, and Installation Sales

If your company is relationship-driven—and all but the most transactional of businesses should attempt to form some kind of relationship with customers—you can create a pricing schedule to deepen loyalty one step at a time.

  • Conversion sale: Convert a prospect into a first-time buyer by letting them try out your firm's ability to deliver. Just as you wouldn't propose marriage on a blind date, you don't want to overwhelm a prospect by asking for too much commitment before trust has been established, so don't hit them with a “total solution” plan. Offer a bite-sized product or service and price aggressively. As long as you break even, you stand to make it up, and more, once the relationship is established.
  • Reorder sale: Your goals here are to keep customers buying and boost your firm's profits. Since you have already paid to acquire this customer, you can position your services efficiently at prices that maximize profits.
  • Installation: Now that the customer likes you, it's time to increase loyalty one product or service at a time. Your price and margin for the next product or service should fall somewhere between the low of the conversion product and the high (standard price) of a reorder product.

How do you know when to move a customer from conversion to reorder to installation status? Determine the logical or companion product to the one you just sold. If you can identify the trigger point at which a customer moves from erratic buyer to stable customer to loyal advocate of your firm, you can price for the next product and pave the way for upcoming sales.

Commandment #6: Don't Forget Warranties and Service Agreements—and Don't Give Them Away

Warranties and service agreements can accomplish two important goals for your business. First, they provide a degree of comfort for customers. Second, they can immunize your company against unreasonable customer demand while growing your profit margins … if you price them correctly.

Don't let warranties or service agreements cut into your margins. A properly-priced warranty will reassure customers who fear being stranded without service while covering your typical cost to provide those services. Figure out what a product or service typically requires in terms of “after-sale attention” and compare this to the typical customer's need and ability to pay. For example, a supplier of high-end medical equipment to doctors in private practice might offer annual service plans covering monthly checks and maintenance. Because the supplier knows that most problems can be avoided through proper maintenance, he is preventing the high costs of replacing components under warranty, keeping his customers satisfied, and earning that monthly service fee.

Price your agreements and warranties to encourage customer behavior to match your perfect model. If the customer is high maintenance, set a high deductible or price-per-occurrence. On the other hand, if the customer's concern is higher than what they will probably need, consider offering unlimited service for a fixed price.

Commandment #7: Know the Limits of What Pricing Can Do

You get a call from a local funeral home with exciting news: caskets are on sale! Save 30% on the top-of-the-line model. What do you do? You will politely decline the offer … because you don't need a casket!

Certain products and services are inelastic in terms of price, meaning that fluctuations in pricing have little to no effect on consumer behavior. It doesn't matter that your dentist is giving a great deal on root canal unless you happen to need a root canal, right? If your target market is unaffected by pricing, you can't move demand by slashing prices, and you will end up cutting into the profits on what you do sell.

On the other hand, some products are highly elastic. While sitting in the dentist's waiting room (preparing for your root canal), you spot an advertisement in the local newspaper. A travel company is offering a four-day, three-night, all-inclusive Las Vegas trip for two for only $199? Five minutes ago you had no intention of taking a vacation, but hey, it’s a great deal—and you're having root canal, after all! Don't you deserve it?

Price to What You're Worth

In closing, never forget that price is sometimes more important to you than it is to customers. Too many owners of smaller businesses, in their eagerness to grow, end up under-valuing and under-pricing their products and services. The result? They work too hard for too little, and their customers may not respect them enough. Don't price yourself out of the market—but don't give away your Best and Highest Use®, either.

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 abirol@andybirol.com, or on the web at www.andybirol.com.


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