Settling on a pricing mechanism for your products and services is a profoundly important element in a successful enterprise, but is often the last thing done.
Ask a few people internally, go and see what others are doing, or just add a margin to your costs and out you go, all of which will result in a less than optimal revenue/margin mix.
Settling on a strategically driven price is really fundamental to financial success.
When should I tell them the price?
My general advice is an old saying mumbled to me by my key mentor as a young bloke: ‘He who mentions price first, loses‘. ‘Anchoring‘ is a key concept in a sales conversation, reflected in this adage. In consumer products, this is cannot always be the case, walk into any supermarket, and the price is there for all to see, so our options are limited, as we have lost control of the conversation. That conversation happens in the buyers office, where there is usually an imbalance of power in any event. However, in B2B, we generally have control over price, so we can manage the conversation, in which case, the old saying holds. Psychologically, it feeds into another old, and often repeated saying, this time from Warren Buffett: ‘Price is what they pay, Value is what they remember’. Therefore, it makes sense that you allow the buyer to reflect on the value they will get by a purchase, and then price accordingly. On line, this is now being controlled by algorithms that look at your history, the history of those like you, product availability, and a host of other individually tiny, but cumulatively significant factors, and set the price quoted accordingly.
Should I have standard prices?
Are all your customers prepared to pay the same price? No, so consideration of differential price packaging should be a core part of your strategy. The challenge is how to apply differential pricing while retaining control of your price list. The most common categories of differences are demographics, geography and volume. Your local wine shop has trouble competing with the big chains, because they buy a few cases, delivered into their back dock, while the chains buy a few truckloads delivered into a central location for redistribution on retail demand. This increases their stock turn, by minimising pockets of slow moving stock, reducing average cost.
How many price options should I have?
Do not give each customer any more than three price options. Our minds tend to get overwhelmed by too many choices, three is the optimum. Those three options should be clearly articulated with the differences in value that is delivered by each. This strategy is almost universally used for on line sales of software services. They all use the three columns, with varying added services for an increased price.
In which order should I show price options?
Show the highest price first. Often this is counter intuitive, as the instinct of many sellers is to go low in order to ensure they secure the sale, which almost always leaves money on the table. It is way easier to go high, as you then have room to come down while perhaps removing pieces of the value offering that do not add value to the buyer, or that cost you nothing to remove, but seems to be a concession. By contrast, by going in low, you have nowhere left to go if the buyer is looking for ‘more’.
Should I show shipping costs?
No. Instead, shout ‘Free shipping’ which is a powerful motivator. ‘Free’ is one of the most psychologically strong motivating words, so use it by including shipping costs in your price. Amazon has used this strategy to devastating effectiveness by offering an annual subscription that enables free shipping via Amazon Prime, now in over 50% of US households. It also adds a distribution channel for other services, such as video streaming
How can I manage competitor pricing?
You cannot, you do not live in a vacuum, competition is a reality of commercial life. However, concentrating on the value of your offer rather than just the price will deliver the best results. Every purchase decision made has a context, winning just because you are the cheapest is a good way to go broke.
How do I manage price increases?
Carefully, but offering notice of a price increase is both proactive as a means of simply being courteous to your customers, and as a deadline by which they must purchase in order to get the current price. This can act as a powerful call to action.
Another of Warren Buffett’s quips is: If you have to have a prayer meeting before you put your prices up 10%, you have a lousy business’
The final word is that not every deal, not even those that seem to be ‘in the bag’, will come to fruition. The reason stated will often be ‘price,’ but that is rarely the whole story. Politely probing for the real reasons and learning from them for the next time, is a core part of the task of a quality sales process.
Peter,
I am very glad that my musings have added some value to you.
Cheers
Allen
Peter, a difficult question to answer, as we are dealing with intangibles, which adds a significant dimension to the negotiation beyond what happens in the case of a physical product.
In that case, branding, context, and the nature of the relationships that exist play a large role.
My best advice is perhaps contained in the earlier post on the 5 strategic drivers of price, to which I linked in this post. Considering the elements of the drivers in your context will give some sort of roadmap.
Having said that, i have been working in this area for 25 years, and still struggle with it in my own business.
Thanks Allan,
The question is meant to be difficult, and your final sentence hits the mark immediately. No single, ‘sure fire’ answer to had, for sure.
The Drivers article is a good redirect, thank you.
I guess thee is also the small issue of ego involved on the (prospective) buyer’s part. Do they know they need help? Are they going to ask for help (if they know they could use it?) What will the Board say if “I” show “weakness” in asking some one lese to help? All rather tricky issues to navigate.
Thanks for the article and response, both appreciated.
Allan,
A very good explanation of the process and psychology for goods. What comments and follow up do you offer on the same topic for services, which are inherently more ‘value’ driven?