In this webinar, we will explore some of the key issues surrounding pricing and provide you with insights you can apply to your own situations.

In fact, this topic is so critical to me (and to most entrepreneurs) that I devote considerable time and space to it in my two books, “How To Succeed As An Independent Consultant, 4th Ed. (published by John Wiley & Sons) and “The Quintessential Guide To Using Consultants” (published by HRD Press). Both of these books are available online at www.amazon.com, www.bn.com, or www.borders.com, as well as “brick and mortar” bookselling retailers.

In addition, I frequently publish articles in publications as varied as; BusinessWeek Online, Connecticut Post, Training and Development, Grocery Headquarters, and many others, as well as so-called “e-zines.” I am often called upon to provide context for radio interviews around small business issues, of which pricing is a key component. Lastly, I am a repeat presenter at numerous industry conferences and corporate events where pricing is a topic that often gets discussed.

As a tactic - it is one of what are commonly referred to as the “4 P’s”:

Product – what is the ‘offer’ being provided or the service being extended to the market? In short, what it is you are trying to sell?
Placement – where do you attempt to sell it? Online? In retail stores? Through Distributors? Etc. How do you wish to be compared to others in the marketplace? Do you want to have a “side by side” comparison with the market leader? Are you looking to “break new ground” with your product/service by opening up new distribution opportunities?
Promotion – how is the product advertised or marketed? Are you relying on word of mouth campaigns? Search engine optimization techniques, or other methods for driving business to you/your business?
Price – what is the investment or cost you expect customers to pay in order to become a part of your clientele? How does that match or mirror what other competitors are charging?

As a strategy, price communicates a certain “quality” to most people. In the absence of other information, many customers assume or default to the belief that a higher priced item is made of better materials, has more features, or in some other way is an improvement over lesser priced goods and services.

Your pricing will signal what you wish the perception of your product or service to be in the minds of customers or clients. Of course, the other factors that commonly impact perception need to be aligned with the price to sustain that image (packaging, advertising or marketing support, etc.). A plain brown paper bagged item does not convey the same product image as if it comes wrapped in a blue box with a ribbon that clearly is associated with Tiffany’s jewelry store.

The last point on this slide is making sure that your products or services reflect the “graduated levels” of offering you provide. It would be confusing for the customer to pay the same price for your “entry-level” items as they do for your more enhanced products and services. There ideally should be an incremental difference as products or services become more fully featured or more comprehensive/complex. Be certain that your own products/services are reflective of the value you are intending the customer interpret in each of them.

What are your costs to produce or provide the product/service? Include both the raw goods costs (ingredients, components, etc.) and the indirect costs that the business must absorb, but are “spread out over” all customer orders. While the computer or the light bill is not going to change dramatically on a project by project basis and it may not be easy to apportion out to each customer’s order the “fair share” of those costs – they need to be accounted for in the price or the business will lose money by only covering its “direct” costs of raw goods and not the additional costs required to run the business (health insurance, vehicles, owner salary, etc.).

In most cases, the competition will already have established a “range” of pricing (unless you are the first to market or creator of a new product) and you will be compared against the “market expectation” for pricing. While your service or product may exceed the competition, or you may feel you are offering only the most essential aspects of what customers want or need and nothing more – you will still be based on what other competitors charge. Are you “worth” twice what they are? Are you able to gain market share or customers by charging a 10% less price (or will it take a bigger discount)?

How much interest is there in the market for your product? Obviously, when demand is high, there is a greater chance to charge more for it (subject to competitive conditions). If the market has little use for what you offer – even if it is the BEST on the market – it is not going to likely lead to many sales.

Profit requirements are also necessary in determining pricing. Different business models will approach the “how to” of this uniquely. Some businesses prefer to sell “mass appeal” products at a low margin (meaning less profit per sale), but intend to sell many of them to reach a profit target. Other businesses will look at the opportunity or segment their target market and determine that they would rather sell fewer items, but do it at a much larger margin. Regardless of which approach is used – they both should be driven by what the eventual profit target or goal is (and then build pricing to support that and still be reflective of the other concerns listed).

Do customers flock to you and purchase large quantities when you drop the price? Do they prefer to buy from competition when your prices are raised? Finding that exact “cost/benefit” or “value” level can be a matter of trial and error at times – but it can be done by paying attention to the response received or generated.

Does competition tend to follow your lead (when you drop price, they drop price? If you raise price, they remain where they are, etc.)?

How the product is sold, or the “go to market” approach can influence pricing – customers may be willing to pay more for items that are conveniently delivered to their doors versus those that they have to seek out in a store to purchase. Internet purchased items are often priced differently than those available elsewhere for this reason. On the other hand, the reverse can also be true in some instances – because there is no “cost” associated with selling the product, customers expect in certain instances that the price will be less online, as the stocking, warehousing, and labor costs typically absorbed by a store carrying that item are not absorbed when sold online. Knowing your customer and how the product is shopped is essential to meet pricing criteria.

What comments or feedback do you receive from customers when they purchase from you? Are they generally positive? Do they make mention of what a bargain or a steal they are getting? Or, do they constantly refer to how a competitor is undercutting your prices for essentially the same offering? (be aware though, they are buying from you as they say this…so while they may be complaining, there is still a reason why they purchase from you and not your competition).

The last point is – are you meeting your profit, volume, customer targets? If not, it may be pricing related. Examine whether there are other factors influencing that, or if it is a price point that can be adjusted up or down to meet your established targets.

Of course, this assumes that the SAME level of sales will occur (which rarely happens in real life…higher prices tend to reduce quantity of sales and lower prices increase sales – BUT, is the difference sufficient enough to make up for what is “lost” by changing the price?). Will sales gained more than outweigh the reduced margin on a per unit basis? Will margin acquired make up for the lost sales opportunities?

The downside is that if you change the price, you can also change the perception of the product or service in the minds and eyes of customers. If I paid more for your offering last year, and now you lower the price…I may feel betrayed and feel cheated (it was not worth what I paid for it). If you raise the price on me, I may feel that you “tricked me” into trying it and now are looking to sneak one by me by increasing the price and hoping I won’t notice.

When choosing to change price, be aware of how closely the customer knows the price to begin with. In a frequently purchased product or service (buying white bread or automobile fuel, most of us know the price point last paid within a couple of pennies). In a less frequently purchased product or service, the price may be more variable and subject to changing without any real noticeable drop off in volume (automobile tire rotation or buying house paint for most people is done infrequently and the price points are less certain in the minds of most consumers).

If a price is about to change, give loyal customers a chance to “stock up” ahead of a price change (we are going to change our prices as of June 1st, but if you order now, we will honor current prices through the end of the year). If pricing will drop, allow preferred customers to get a head start prior to the drop (as of November, our prices will decrease by 10%, but as a loyal customer, we will extend that lower price to you now for all orders over $XX.).

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