“You Get What You Pay For.”
“People only look at price because they have nothing else to judge you or your business on.”
Have you heard these phrases? Do you believe them?
When it comes to pricing, it may be difficult to know how to set your prices, and when it’s time to raise those prices.
As I work with entrepreneurs and business owners, I often observe how they undervalue what they offer to their marketplace—especially for services.
Why is this? I have some theories: #1 –The business owner really doesn’t want to grow the business because growth means more responsibility. Yikes! #2–There’s fear that prospects will turn away and never return if prices are too high. #3 – Their competitors’ prices are similar, so there’s comfort in staying in that same price range.
Do any of these resonate with you as an entrepreneur or business owner? Are you doing the same?
I’m not suggesting you impulsively raise prices without understanding your costs, break-even point, and competitors’ pricing. Understand a few guidelines about pricing; then I applaud you for confidently taking that step to charge more and establish higher prices.
Here are three factors to consider before you establish or raise your prices:
#1 — Positioning
How is your company positioning its products and services in the marketplace? For instance, do you want to be known as the…
- “Luxury exclusive”?
- “Unique service”?
- “Premium add-on”?
- “Superior experience”?
There are a variety of methods for pricing: Skimming, penetration, product bundling, high-low pricing, everyday low price, dynamic pricing, and many others.
Because setting prices is sometimes more art than science, you’ll need to research the perceived value of your category. In the coffee category, Starbucks reinvented the coffee market by creating a whole new way of pricing. They established what are known as “anchors” with new names for small (Tall), medium (Grande), and large (Venti) coffee drinks.
Coffee has taken on a different status since then.
Now when consumers order coffee at any other coffee house besides Starbucks, their mind begins a comparison process (even unconsciously) to what Starbucks charges. Suddenly it’s ok to charge $4 for a cup of coffee. But not every coffee house can. They may be lacking strong branding. Starbucks has positioned itself in the marketplace where their brand equity now dictates premium pricing.
Ideally, your action item is to build a strong brand so your prospects are immune to price increases. In fact, they should expect it. When my sister raised her prices at her personal training business after several years, the response from many clients was: “It’s about time.” Halleluiah!
Consumers really do hold strongly to the notion of “You get what you pay for.”
#2 — Demand
What is the current demand for your type of product or service? Is there a gap in the marketplace that yours can fill? Are consumers dissatisfied in some way with their current choices? If so, you might be able to deliver what they want more efficiently, quicker, with more choice, or in a specialized way. And they’ll pay you handsomely for it.
Perhaps you’re the day spa that offers meditation and custom life coaching, or the chiropractor who accommodates the late workers by staying open until 9 pm.
What can you add to your customer’s experience to charge more?
It should be something that’s important to them. For instance, if you walked into a McDonald’s one day to get a Big Mac and noticed tables donned with white tablecloths and employees dressed in formal attire, you would wonder what happened to your neighborhood McDonalds. You were expecting to enjoy a casual, relaxed meal with family. Management might have believed that white tablecloths were desired by their customers and made the change based on their hunches. But they would be wrong. McDonalds will never be known as a formal restaurant. It’s come to be known as the place you take your kids to play while you enjoy your burger and fries.
Don’t make this mistake in your business.
Find out the customers’ willingness to pay more by conducting some basic market research. Start by gathering a small, informal focus group of prospective buyers. Ask them, “What would you be willing to pay for this product/service?” and “Why are you willing to pay that?” Then chart the answers and determine where the price sensitivity lies.
And remember that consumer values and preferences run deep to affect demand. Understand how these are translated to consumer wants and needs. Then give them what they want, at the right price.
#3 — Perceived Value
What is Value?
Specifically, Value is the ratio of perceived benefits your customer has to price. (Value = perceived benefits/Price)
Price oftentimes influences shoppers’ perception of overall quality and ultimately its value to them. In a survey of home furnishing buyers, 80 percent agreed with the statement: “The higher the price, the higher the quality.”
Kohler walk-in tub for children and the elderly is priced higher than conventional step-in bathtubs. But buyers are willing to pay more for what they perceive as the value of extra safety.
Make sure your pricing is in line with the value the consumer places on the benefits your business offers. For example: A homeowner who has water soaking the living room carpeting places a high value on a benefit that fixing the leak provides. There is now an urgent need for a plumber. So the plumber charges $125, even though the pricing may be only $35 (labor, materials, travel).
Another way consumers perceive value is when they purchase items in bundles. Here, pricing is based on the idea that the shopper values the package more than the individual items. And benefits are received because they don’t need to make separate purchases. One well-known example: Airfare, car rental, and lodging offered as a bundled package.
That being said, are you communicating the benefits of your products and services to your consumers based upon what you know they value? And if you don’t know what they value, your homework is to find out! Is it status, convenience, safety, stability, ruggedness?
Your target audience may be willing to pay more.
So is it time to evaluate your pricing structure and raise your prices? Make sure you consider Positioning, Demand and Perceived Value before you do. You have many pricing options. Choose the one that works for your business and the audience you’re intending to attract. Charge based on what you’re worth and what they value.
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Carolyn Ortman is a marketing expert, leading organizations to improve their bottom line by giving them new perspectives on how they present themselves to their marketplace.
Her focus is on branding, marketing strategy, customer service, and leadership practices. She delivers on these topics through her love of speaking, training, and consulting.
As the principal of CKO Marketing Group, she passionately steers businesses through the confusing maze of marketing choices to increase revenue and create their impact on the world. Her Marketing MBA and 11 years as a business owner serve her well in delivering results for her clients. She can be reached at: firstname.lastname@example.org