The Australian Small Business Blog

Monday, April 02, 2018

At What Price

by Dr. Greg Chapman

When marketing a product or service, businesses find it difficult to set their prices. Too high, and no-one will buy, too low, everyone will buy, but you will go broke. So how do you set your prices? The basic principle of pricing is that you should set your prices as high as the market will allow. But what does that mean?

(You may not decide to do this for other marketing reasons such as trying to buy customers, or offering an introductory price to encourage people to try a new product or service. But this should be a conscious strategic decision.)

When setting their prices, the single biggest mistake that businesses make is not to understand the value they offer compared with their competitors. So you must understand why your product is better than everyone else’s.

Is it stronger? Does it last longer? Is it better designed? Does it look better? If it is a service, what are the superior results you provide? What is the value of such differences to the buyer?

If it is a commodity, then what else are you offering? For example, you can get a $2 chocolate snack bar at the service station as you are filling your car. You know you could probably get the exact same bar for 25% less at the supermarket, but you will have to make a special stop, and then you will have to wait in a queue. Its just not worth the 50 cents you will save. You are prepared to pay 50 cents for the convenience of buying the bar now. But if the bar was $5, would you buy it? Well you might if you knew that this service station was the only retail store for 200 miles!

Economists call this decision making “the cost of shoe leather” which is the amount of effort you are prepared to make to find a saving on your purchase.

When you understand the value of what you provide compared with your competitors, and that includes substitutes for your product or service, you can then better set your prices.
So if you product lasts twice as long, could you charge twice as much? Well consider the inconvenience factor of the replacement. If the item was socks, the inconvenience factor might be quite low. But if it was a special valve inside a jet engine, the replacement cost of which was many times the value of the valve, you could probably charge considerably more for the valve than twice the cost of a valve that lasts half as long, particularly if you guaranteed its lifetime.

So the value of the product has little to do with the cost of production or service. It is the value of the product to the buyer. But it is not enough for you to know the value of the product or service to the buyer. The buyer has to know as well. But it is surprising how often that a buyer really doesn’t understand the full value of what they may be buying.

If the buyer does not understand the value of what they are buying, they won’t pay what it is worth. If they don’t know there is not another retail store for 200 miles, they are unlikely to pay $5 for that snack bar. And the jet engine manufacturer may not understand the maintenance cost implications of a lower quality valve to the end user.

When you know what your product is truly worth, and you have educated the buyer of its value, you will be able to set prices that reflect that value.

If you don’t understand your value, you will forever be just another commodity seller competing on price.
If you want to listen to an interview with me on Pricing Strategy, and be a Price Maker rather than a Price taker, and learn 57 ways to raise your prices click here .

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Dr Greg Chapman is the Director of Empower Business Solutions and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.

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