Business Techniques in Troubled Times has been running a series of ten articles on pricing techniques. This article sums them up. To see them all, go to Pricing | Thomas H. Gray.
Pricing Basics: Value Positioning and Margin – these are the two basics in pricing. Customers buy value, so you must know what your customers value, and how well you deliver that value compared to competitors. Be better, and charge more. Margin is price minus production and sales costs. You use margin to pay for your fixed costs, and to reach your target profit. So know your costs to set your price, but set it to earn the target profit, not just cover costs.
Margin Analysis Drives Pricing – understand the cost elements for each product, expressed as a percentage of its sales price. Then you can tinker:
- change how you use a cost element to reduce its percentage of price
- raise the price itself, perhaps in small bites, or only for products facing less competition
- bundle low margin and high margin products into a package whose price yields a higher margin
- stop serving customers who demand low margins
Pricing Tips: Start High; Big Results from Small Changes – the list price is an umbrella. It allows room underneath for temporary promotions, but only if the list price is high enough so that margin remains even after the discount. The other idea is this: small price changes can make a huge percentage change in your bottom line. Customers ignore small changes, but if you understand your margins, you realize that a 10% price change could mean a 100% change in profits.
Pricing in a Job Shop: Setting the Shop Rate – avoid the two biggest mistakes: forgetting to include your target profit as one the “costs” your price must recover; and assuming all paid hours are also billable hours. The tip about small changes having big results applies here too!
Pricing Technique: Good, Better, Best – offer customers three levels of quality/service for three different prices. Customers like choice, and tend to buy more than the basic tier. Plus, three tiers shows a clear upgrade path to the risk-averse.
Pricing Technique: Value in Use – set your price according to how much your product saves the customers vs. their alternative. If you save him 10, charge him 5. Split the value with him. He’s thinking about his value, not your costs, so set your price based on what he is thinking about.
Price Structure Alternatives – what are you charging for? Is it hours, or a finished project, a product unit or set, or the right to buy some (membership fee) or a right to use (subscription fee)? This article offers nine price structures with pros and cons for each, plus a few recommendations.
Differentiated Prices – who would happily pay more, and who would buy elsewhere for a lower price? You can charge different prices per customer group (e.g. students) or per location (e.g. resort) or by time (e.g. due date or show time). This article offers six bases for differentiation and situations for each.
Promotional Pricing – temporary discount programs can boost sales. The new customers may stay with you for years: what is their lifetime value (profit) to your company? This article explains eight promotion types, but there are many more. Always test your promotion to see if the results are what you expect and are worth the discount.
Pricing to Distributors: What is a Reasonable Markup? – if the producer margin is only 15%, why does it make sense to expect a wholesaler markup of 20% and a retailer markup of 40%? Margin and markup are not the same thing. Wholesalers and retailers cover their costs out of their markup. As a producer, you must understand the retail price for your product, and the costs/value of your distributors. Your product’s value vs. competition sets this ceiling, and all the markups and margins work within the range of market price and producer cost.
Pricing is a fertile field. Readers surely have other techniques that work for them. Share them in a comment on this post!
Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or firstname.lastname@example.org. See www.tom-gray.com.