Three things to consider when pricing your product or service
Occasionally we receive questions on how to price products and services and if the pricing seems “good.” This became the subject of a conversation I had with multiple business owners recently as well in light of minimum wage increasing in Washington State.
1. Will customers leave if you raise your prices?
Sometimes. This can be a bit of an unknown factor and it really helps to understand your niche. Keep in mind, many industries go through daily price fluctuations and don’t lose customers.
When we talked about it as business owners, we found that we agreed on the idea that many people will use price increases as the excuse for leaving. typically they have other motivations for leaving that you may not have known. Maybe they have a family member who is entering the market or they really don’t need the service/product anymore.
In most cases, that is 100% okay! It can be a good thing to focus in on more dedicated clients. This can also create more efficiency in your business by having that focus. This concept is outlined in the book, Great At Work by Morten Hansen.
2. Priced too low / too high
This can be very difficult to discern. Nurture and personality I think come into play on how to we as humans can approach this part of the equation. Many feel that they “always” have to undercut the pricing of their competitors.
Others want to provide a “premium and premiere” service that is priced 2x-3x higher than competitors in an attempt to create a premium client list.
Which way is right? Neither really. It depends on your target audience and who you are hoping to attract.
It is good to know and understand the market as a whole as well. If you are pricing food out, do interviews to understand your target market and what they are willing to pay on a regular basis for the level of food and service. What are the competitors charging? Are there opportunities to exploit weaknesses in your competition?
Sometimes being priced too low can be an issue. I worked with one consultant that lived in a rural area providing IT services. He never won a bid in the big city because he always came under his competitors. So he literally just doubled his prices whenever he did a big city job and he began to win bids on projects by doing so.
Same proposals, same presentations, just a doubled price.
3. Value Pricing
Value pricing can be a bit tricky, but I believe it is very important for entrepreneurs and business people to understand when selling a service/product but almost more important when buying a product/service.
To illustrate my point, I ask the following question:
Why spend 10 hours of time using a hammer when you can use an impact driver for 2 hours and achieve the same results?
That seems like a simple question, but we can break this out even further:
If your time is worth $65/hr and you bid out a minor construction job that requires a hammer and can be done with a power tool like an impact driver, we can evaluate the following:
|Time||10 hours||2 hours|
|Cost||$5||$100 on sale|
|What you charged the client||$1200||$1200|
|Value||Job done||Job done + 8 additional hours|
The customer is ultimately not interested in how the job is done, just so long as its done and done “right.” So you still charge $1,200 for the job whether you used a hammer or an impact driver. But was the $100 impact driver worth the price even for just 1 job site? Now you can use that impact driver for multiple job sites saving you time and making you more money in the long run. So the impact driver is a win-win-win. And admittedly, these are so light and powerful it’s a no-brainer for any DIYer 😊
Transferring this to other tools like Websites, Office 365 subscriptions or even data backup systems – the value created by these outweigh the initial costs.
Value-based pricing works to help you match the appropriate price, value and profit together so that you are creating win-win-wins across the board. So when you are trying to figure out how to price your product/service, evaluate the true value provided to the end-user and work backwards.