Grow your business: The price is right -or- not?
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“Do what you have always done and you’ll get what you have always got,” Sue Knight is quoted as saying. Product or rate pricing is one of, if not the leading issue for the ongoing success of your company or firm. If it is too high, you will lose clients; if it is too low, it might be difficult to keep up with the demand and/or you might not make a profit. If your price/rate is somewhere in between, your business is fortunate. Yet, prices are dynamic, not static.
Market price dynamics set the stage. Competition refines it. Pricing, in and of itself, is a top line item. It is the most important component of the revenue structure in your company. If you get it right, other issues can garner your attention. Get it wrong and the potential for continued company growth diminishes. Pricing and costs impact your margin and the resulting profitability.
For service firms, many studies have shown that incrementally raising your hourly rates each year is far more effective than waiting for several years and raising them one time. Most clients understand and accept smaller rate increases. They are also more likely to notice and express concern about one big increase.
Author Alex Grassey has identified five components for pricing rates or products. He calls them the 5cs for; Competitors, Costs, Customers, Context, and Confidence. In a recent article he points out and recognizes the importance of the first three, as they are taught in business schools across the country, but his addition of context and confidence is noteworthy.
Most companies or service firms have some form of competition. If not, it will not be long before they do. Of any component that makes up your pricing strategy, taking a look at your competitors is probably the best thing you can do in order make a more informed decision on your pricing. If you are priced above them, your next step is to prepare an answer for why your pricing is higher; better service, higher quality, etc. Grassy has observed the following about competitors “The mistake we make here is to adopt their prices as our own. We let their prices become the ceiling. We adjust our prices to be equal to theirs or slightly less. We make one of two assumptions here: first, that our competitors know more about pricing than we do. And, second, that our customers prefer our offerings as equal in value.”
Many business owners determine a price based upon a multiple or a percentage of their cost. If they sell products, their cost is the cost of their goods. If they are a service firm, it is based upon the cost of their labor or a standard hourly rate based upon the service being provided. Grassey commented “The appeal of this approach (the cost plus pricing formula) is undeniable: it’s simple and straight-forward. It feels scientific and, therefore, accurate. But there are three main issues with this approach: i. Costs are often calculated incorrectly. In particular, key things are left out. Things like a proper cost for the owner’s salary, debt payments, customer acquisition costs, and allowance for future business expansion. ii.The percentage that’s added is often too low. iii. The price that’s calculated becomes the ‘ceiling’ price. In other words, the business will never charge more than this price.”
What is a customer willing to pay for a product or a service? That can be a tough question. If they are already your customer, obviously, they have been willing to pay it. The next question becomes, are they willing to pay more or not? Grassey states, “We really must explore what our customers think of the value they receive from us. Otherwise, we’ll leave significant money on the table.”
Context and confidence, as Grassey states, really make pricing more real. He cites the perfect example. “One hour of a plumber’s time is worth way more to you when a pipe has burst. It’s the same same person with the same tools in the same house but we’ll gladly pay a significant premium.” In other words, context is dependent upon the situation and the circumstances. Confidence is when customers value us highly for whatever set of reasons and they are willing to pay a higher price.
All of these possibilities should be taken into consideration when you are addressing the price for your service or product and growing your business.
