4 tips to get your pricing on track
The question of price setting is one we ask our clients when reviewing their profit, to determine if their prices are at the right level.
This article gives some good background to setting your prices correctly.
We generally find there is a lack of understanding of the psychology of pricing by many business owners and, more often than not, the strategy of pricing becomes almost throwaway.
By being systematic about your approach, you can determine the right price point and maximise prices which customers are willing to pay for your goods or services. Here are four steps to getting your price setting on track.
1. Give ample thought and time to your price setting process
A rooky mistake is not prioritising this highly complex area. The consequences can be dire – set prices too low and you leave money on the table; set prices too high and noone will want to buy what you’re selling.
The right price is the maximum the customer is willing to pay
2. Understand what each number says to potential buyers
Subject to having no other information, price can indicate quality or value and we typically look to price first to tell us. Therefore, more expensive products and services are perceived to be better quality, compared with those that are priced lower and perceived to be lesser quality.
Businesses manipulate price to communicate something about their offering. They may lower a price to communicate value for money, or increase it to convey quality or prestige. Of course, neither may be the case, but it is a message that the business putting out there. But pricing also needs to align with your other brand elements. For example, if you are trying to price for exclusivity then your marketing, packaging, sales pitch, etc also need to reflect the exclusivity of your brand.
Look at your own behaviour: If you bought a coffee today, how much did you pay for it and why? Do you pay more for a cup of coffee from a café than you do for a takeaway in a disposable cup? Do you pay more for a cappuccino crafted by a barista than fast food filter coffee? Did it also come with a shortbread bite or a petit four? The price you paid communicated the perceived quality or value created by the seller.
3. Focus on how people feel, not how they think
Connecting with customers will bypass objections or sales resistance and let you work on relationships. This stops you having to justify your price and what you are worth and allows you to sell to people. You can price higher and sell more if you engage and form relationships with customers even if the product may be inferior.
Ask yourself why someone makes a longer trip to a favourite business rather than go for convenience around the corner. It’s often because the transaction has moved past price and that business has built a relationship that sells to a person. How you communicate with customers affects your pricing – your setting, atmosphere and ability to pay attention to detail communicates to each customer and sets up their expectations.
4. There is always an element in irrationality
Keep in mind that pricing also needs to reflect people’s behaviours. Why do some people still buy bottled water when they can fill a drink bottle at home with perfectly safe tap or even filtered water from their fridge? The reasons people pay for bottled water is not rational so the pricing of it reflects a premium for that behaviour.