Considering Six Approaches to Effective Pricing
Pricing is an integral part of the marketing process. The right price can generate more sales; the wrong price can make your potential customers and clients look elsewhere. The following are six of the most common approaches to setting prices. Carefully consider which approach makes the most sense for your business as you determine your pricing strategy.
- Start-up pricing: If you're just getting started in your business, offer your customers an introductory rate that's set at a point somewhere between what other, established businesses charge and the amount you would be paid if you were doing the work on salary for an employer.
- The going rate: Set your price at the going rate and differentiate your business through things other than price, such as better customer service.
- Splitting the difference: If your competitors offer a range of prices for the same products or services — some high, some low, and some in between — split the difference between the top and the bottom of the range so you can be sure that your price is neither too high nor too low.
- Percentage of the results: Rather than focusing on price, focus on results by tying your fees to the outcomes that you bring about. For example, if you run a collections business out of your home, you may charge a percentage of the money that you collect, say 40 percent, or 40 cents of every dollar collected.
- Bargain basement: If you really want to generate a lot of business quickly, you can dramatically undercut your competitors' prices. Before you try this approach, understand that some potential clients may be wary of buying products and services that are priced substantially below the competition. Understand, too, that you may not be able to keep this approach up for long without doing serious financial damage to your company.
- Premium: Another option is to set the price at a premium, above your competition. This approach works well when the product or service you sell can be differentiated from those offered by your competition, and you can add value that your clients and customers can see and appreciate.
After you set your prices, keep close tabs on what your competition is doing. Are they raising their prices? Lowering them? When your competition moves, be prepared to adjust your prices accordingly. Many times, you simply want to maintain your prices exactly where they are, and deny requests to lower or discount them. While you may lose potential customers in the process, your business will be healthier.
The following sections examine price increases and decreases.
Price increases are not usually a pleasant event for the company that makes them — no one wants to tell their clients that they are going to have to pay more money for their products — but they are often necessary for a variety of reasons. Here are some of the most common:
- You've underpriced your products. After you set a price and begin to sell your products and services, you may discover that the money you're bringing in isn't enough to cover the expenses of the business and generate a reasonable profit. In this case, when you can't or don't want to reduce your expenses, you have no other choice but to increase your prices.
- Your expenses have increased. If your costs of production increase, you can either reduce your profit or increase your price. The choice is up to you.
- You need to cover a client's hidden expenses. If you're performing services for a client and discover costs due to working with that client that you didn't anticipate in advance (for example, your client requires you to attend meetings twice a week instead of just once per month as you planned), you have to find a way to recoup them without reducing your profit. The easiest way is to increase your price.
- You want to test the marketplace. Sometimes you simply want to test the marketplace with a higher price, to see if the quantity of units that you sell increases, decreases, or stays the same. Airlines, food manufacturers, and others do this all the time.
- You don't want the work. What if you don't want to do work for certain clients at the low prices you have agreed to? The best way to get out of this kind of situation is to raise prices to a point where you feel you're getting the profit you deserve. If the customer decides to pay more, great! If not, you won't miss it.
Whatever you do, be as forthcoming as you can possibly be when you increase your prices, and give your customers plenty of advance notice so that they can adjust.
In some cases, you find that there's good reason for decreasing your prices, such as the following:
- You've overpriced your services. If you've overpriced your services, you can choose to keep the extra money as profit or give it back to your customers as lower prices.
- Your expenses have decreased. Then again, you can always keep the fruit of your decreased expenses as profit and increase the amount of money you're able to put into savings.
- You want to reward long-term clients. Long-term clients always like to know that they are appreciated. You can show your appreciation for your long-term clients (and build their loyalty) by decreasing the prices you charge them, either on a one-time basis or permanently.
- You want to get new work. One way to get new business is to drop your prices for new customers as a way to introduce them to your company and your products and services.
- You want to extend a professional courtesy. Doctors, lawyers, and other professionals are noted for extending lower prices to colleagues as a professional courtesy. Why not extend lower prices to your colleagues, too?
As with any other price changes, make sure that you lower your prices as part of an overall strategy, not just as a reaction to some momentary event. If in doubt, leave your prices where they are until the case for changing them is more compelling.