Pricing for Perfection

Pricing is a four letter word. Many entrepreneurs I know hate to price their products because pricing seems to be so challenging: Pricing your product or service too high may lead to fewer customers (and thus, fewer profits). Pricing your product or service too low may lead to fewer profits. Of course you HAVE to price your products or services; so what should you do?

In a blog post for BusinessBlogs.co.nz entitled “Revenue is Not Your Friend – Pricing for Profit“, Charles Blakeman talks about the need to raise your prices.

Blakeman rightly points out that low-price providers tend to attract customers who are highly price sensitive. And I hear the same thing from salespeople and seasoned business owners all the time: The people who offer the lowest prices frequently have the most challenging customers and the biggest customer turnover. One of the reasons has to do with customer loyalty: A price-sensitive customer is often less loyal because they go where the lowest prices are.

Okay, so if pricing needs to be set more effectively, how can you do that? You can read more about pricing and what goes into pricing and value and cost from one of our IAC-EZ participants: Check out Aaron Hoos’ blog post “Prices and Pricing Strategies: How to Price Your Offerings More Effectively“ where talks about strategies involved in being the high-priced, medium-priced, and low-priced provider.

And in another blog by Blakeman, he provides what I think is probably the best list of pricing how-to options I’ve ever read: He gives ten ways to help you figure out how to price your products. Read it here.

Jessica Routier, IAC-EZ

How to price your services: The story of a freelancer

Recently, I posted a story about Swatch in our ongoing look at pricing products and services. In this blog, I want to talk about pricing services and use the example of a freelancer I know who recently went through this exercise.

Pricing services can be hard. The pricing metric (Daily? Hourly? Project-based?) is influenced by factors like what is actually delivered and how long it takes and what is acceptable in the industry.

One freelancer was trying to figure out how much to charge and this is what he did: He determined how much he wanted to earn in a year and then worked backwards to figure out how many days each week he wanted to work and then that gave him how much he needed to earn each day. Then he divided it further to determine how much he wanted to earn each hour.

Thus, he had an hourly, daily, weekly, monthly, and annual income goal.

However, most of his clients paid by the project – an accepted standard in his industry. So before he did this exercise, his rate was based on the arbitrary number of how much he thought the project should cost. (Yeah, that’s wide open!). But today, he has a goal and knows when to turn projects down because they don’t pay enough and when to take on a project because it is within his target.

Just recently, he told me some additional revelations and ideas:

• This model helped him to see one client as perennially under-paying for the service they were receiving. He explored the idea of readjusting their rate but decided to end the ongoing agreement.
• This model also helped him to identify an opportunity to grow revenue: as he takes on new projects, he strives to drive his price upwards. That wasn’t something he could do before.

This pricing method is not rocket science and there are other factors, too. For example, many freelancers will need to think about how much time they want to set aside each week to market their services.

Well, we’ve just touched on 3 aspects of pricing in recent blogs. Next month we’ll look at some more pricing considerations.

Jessica Routier, IAC-EZ

How to price your products: The story of Swatch

The Swiss are well known for their watches but they became so focused on their own techniques and ideas that the Asian watchmakers who produced digital watches quickly and easily bypassed them with cheap convenience.

The Swiss were in trouble so one of their strategies in the 80’s was to create a low priced alternative that would not only be a fashion accessory, but it would win back buyers.

The designers set the target price of the watch and demanded that their engineers figure out how to produce a watch at that price. In a way, it was like reverse engineering from the price tag and engineers were able to create a watch that was 80% cheaper to produce because it had fewer moving parts.

What does it mean for you:

Sometimes you will have to compete on price and won’t be able to get away with it. But Swatch shows us that you don’t have to compete dollar-for-dollar. While the Asian market created $10 to $50 watches that were functional, the Swiss created watches that were relatively close in price (about $50) but offered other things as well – like being a fashion accessory.

Application: Look at your prices. If you find yourself locked in a battle for the lowest possible price with a competitor, stop! Revisit your pricing strategy and positioning. Consider how you can compete at a price that is close (but slightly higher) while differentiating your product or service enough to make it stand out.

Jessica Routier, IAC-EZ

Help! How should I price my products and services?

For freelancers, entrepreneurs, and small business owners, pricing products and services can be challenging. The bad news is: I can touch on it in this blog but the thinking out there is so diverse, I could never give you all the answers. But I can at least try to get you heading down the right path and maybe give you some ideas. And I’ll revisit this question from time to time.

Most small business owners know that pricing products and services too high will scare people away. After all, no one wants to spend too much on something when they can get the same thing for much less. Instead, most small business owners will charge too little, hoping that their lower price attracts buyers and eats away at the competition.

Neither of these strategies are good practices for about 80% of the market. A middle range price for your products and services is best. Here’s why:

• Low-cost provider is not always the best option. Low cost providers have to have a sharp eye on all expenses. And, their customer loyalty is out the window because customers who shop based on the lowest price will switch as soon as someone cheaper comes along. (And FYI: someone cheaper will come along sooner or later).
• High-cost provider can be challenging to deliver to expectations unless you are really reaching the luxury market with effective marketing and targeted publicity.

So find out what the price range of your products or services is and stay in the middle. Drop your prices slightly to give occasional incentives, but keep them in the middle.

It’s worth spending time online to find out what other people are paying your competitors for similar goods and services. Don’t be tempted to set your own prices based on a “thumbnail sketch” of prices. Spend the time. Chances are your prices will end up higher than you were expecting, so that research time pays for itself!

Being in the middle also addresses the issue of profitability: It’s actually the most profitable place to be! If your prices are too high, your profitability will actually be fairly low because you’ll have to work a lot to acquire just a few customers. And at the lower-priced tier, you’ll have little or no profitability when you cut your prices as low as they can go. So, you’ll enjoy a volume of customers at the mid-range level with enough built-in profitability to make it worthwhile.

Jessica Routier, IAC-EZ