Pricing is about two things: the economic transaction and a statement of value. Pricing influences customers’ perception and view of quality. A high price can reassure customers about quality and may actually increase sales.
If you find you have to drop your prices or change your product to what rivals offer, it probably means you’re dealing with the wrong kind of customers. Instead, find the right customers – the ones who are prepared to pay the full price for what you can uniquely offer. We need to focus our businesses on things we can do that rivals cannot. This will enable us to increase prices – with the right kind of customers.
Only when we fully understand how valuable the benefits of our products are to the customer can we price accordingly.
This toolkit includes sections that cover the following important issues:
– We don’t have to choose between reducing prices on the one hand, or changing our products or services in a way that “sells out” our principles. This dilemma is a result of the wrong framing of the question, assuming that we have to deal with a particular market (often a local one). Instead, if we reframe the question and ask which customers want our products and will pay the right price, then it leads us to find new customers and markets where price and principles work well together. In this way we can have the best of both worlds.
– How to fully understand the economics of our businesses. This involves understanding costs fully, including non-obvious costs including overheads and depreciation. It’s only when we include all costs in our calculations that we can work out the minimum price to charge in order to avoid making a loss. This breakeven price is important to know. But it doesn’t mean that you cannot charge even higher prices.
– We need to understand value from the customers’ point of view. The price should reflect what the customer gets out of the product, not what we put into it. Once we understand the full value that the customer enjoys, we can price accordingly. Sometimes we make assumptions and don’t fully understand the benefits that the customer derives from our products. Sometimes these benefits are intangible, such as a feelgood factor, a sense of community, a connection with the back story etc.
The issues covered in the sections of this toolkit are interconnected. To make the most of the toolkit use all of them. You can deal with them in any order.
I wish you every success!
David