Sales: Five questions to make sure the price is right

30 October 2015 Kieron Johnson

Pricing a product or service is a lot like negotiation. The old adage, “You don’t get what you deserve – you get what you negotiate,” comes to mind. So it is with your pricing strategy. Choosing the right one can be a bit like finding a needle in a haystack. Consider this article a metal detector.

Would you take pricing advice from a billionaire investor? (We bet your bottom dollar, you would.)

If so, then consider the words of Warren Buffett who once said: “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”

This makes the finding of the Professional Pricing Society – that less than 5% of the world’s largest companies have a dedicated pricing function – all the more alarming. It means that most companies haven’t got the foggiest idea whether they can increase their prices without losing out to a rival firm.

Read our guide to find out if your price is right (and, if it isn’t, how to get it there).

Pricing strategy checklist: five questions you should ask

Working out your price point can be a bit of a drag.

If you have any insecurities about your products or services, this is the time they’ll come to the surface. Read our guide to steer you to a pricing strategy you can have confidence in.

1.Have you set your business goals?

Your business goals can tell you a lot about your pricing – oftentimes, they’ll determine the basis of your pricing model.

Here’s a few (one or more of which you may have in mind):

  • Profitability.
  • Cash flow.
  • Market entry.
  • Increased market share.
  • Increased revenue per customer.
  • A product or service introduction.
  • Increased prospect presence.
  • Increased prospect conversion.

2.Have you done a pricing analysis for your market?

You shouldn’t look at your pricing strategy in isolation.

It should be considered in the wider context of the market for your product or service.

Low-cost operators, like the Easy group, often market their services to a broad audience whereas high-cost ones, like Apple, have a very specific target audience.

The Easys of this world compete in a big market with a whole bunch of players offering similar services, so the odds are that they’ll compete on price. They do everything in their power to keep running costs to a minimum to maximise their profit margin.

By contrast, Apple has high-value, highly differentiated products, so they may be better suited to premium pricing, which calls for a different kind of targeted marketing with more emphasis on customer service.

3.Have you analysed your target market?

By tapping into the preferences of your target market, you’ll know why and how your customers will use your product or service.

Ask yourself these questions:

  • What value (perceived and real) does your product or service bring to your customers?
  • What task faces your customers?
  • How does your product or service make the task your customers face any easier?

Your pricing strategy and promotional campaign must see eye-to-eye with the reasons your customer is ‘sold’ on your product or service.

For instance, if you have a high-end product that uniquely satisfies your customers’ pressing needs, value-based premium pricing may be the best bet. Low-cost promos and freebies will not only confuse your customers, but they’ll diminish the value of your offering and shrink your profit margin.

4.Have you profiled your competitive landscape?

Whether you’re a low-cost provider or differentiated seller, your competitors’ pricing model and price point should impact your pricing strategy in a big way.

Find a minimum of three direct competitors and look at their pricing structure.

Here are some questions you may want to consider:

  • Do your direct competitors have component pricing and are they heavily discounted?
  • Do they ‘bundle’ their products with other products?
  • Do they use value-based pricing, where clients pay a percentage of the total perceived ROI?

Look around for substitutes your customers may use to perform the task or solve the problem that your product or service addresses. Research how much these indirect competitors cost your customers.

5.Have you worked out a pricing strategy and execution plan?

Coming up with a suitable pricing model and execution plan are the final pieces of the puzzle.

Here’s 10 pricing models to think about based on your market, customers and competitive analysis:

  • Market entry pricing: set prices artificially low to break into your market.
  • Economy pricing: set low prices with an emphasis on low manufacturing and delivery costs.
  • Premium pricing: set high prices for high-value products or services.
  • Price ‘skimming’: enter your market with a high price. Once your rivals follow suit, lower your cost and put other pricing strategies in place.
  • Promotional pricing: apply discounts and one-time offers over a period of time.
  • Psychological pricing: set the prices of your product or service in such a way that prompts action. Think 99p shops.
  • Versioning: offer different levels for your product or service: silver, gold and platinum.
  • Sandwich pricing: stock low, medium and high-priced inventory with a view to pushing customers to the medium-priced item.
  • Competitive pricing: set the price level with your competitors and play to win the service side of the game.
  • Value-based pricing: gain an understanding of the value of your product or service in your customers’ eyes and their willingness to pay for it (compared to others available on the market). Apple is particularly fond of this approach.

Pricing strategies are ten a penny but, if you ask the right questions, the one you choose will be the answer to all your business goals.