In today’s world, pricing is becoming a enigma. How do you set prices to ensure value for the customer AND maximize margins? There are definitely some do’s and don’ts to consider.
My biggest DON”T is nickle and diming. Which of us likes that? Let me give you a few examples:
The airlines that charge for bags and are now charging for snacks, drinks and assigned seats. Who likes that?
The banks that have a fee for everything–dormant accounts, ATM fees, exorbitant NSF fees. Who likes that?
The hotels that charge $20 for parking and $10 for internet access but don’t mention it in the room rate communication. Who likes that?
And of course, cell phone service providers. Need I go on?
Recently at a conference I heard a speaker on pricing advocating for the attendees to do the same thing with their businesses–add on charges. His point was people are used to them, they rarely pay attention to them, so why not use them. I will tell you why. They are bad form. Bad choices by some don’t justify bad choices by all. Remember when Mom said, ” Just because they are doing it doesn’t make it right.”? If a particular service is a built in function of the product being purchased–don’t charge extra for the service. In my opinion it is a “gotcha’. You have a captive audience that has no choice but to pay. If you want a one-time customer perhaps you can get away with it. However, I can’t think of any business that is better off with a “one and done” pricing policy.
Having said that, nickles and dimes can be important. No one wants to leave any money on the table that they don’t have to. So here are some things to consider.
DO know what your target customer thinks is a good value and charge accordingly. Be aware that certain things may warrant a premium price and if so, charge a premium price. If you sell a commodity, try to identify a way to differentiate it that your customer values so you can adjust pricing.
DO increase price in small increments regularly. According to a McKinsey report a 1% improvement in average price of goods and services leads to an 8.7% increase in operating profits. Raising prices regularly in small increments may be a much sounder approach than big jumps after years of same pricing. Customers are much more likely to complain about big jumps and rarely feel better when you explain you have held prices for 5 years.
DO consider more than cost in setting a price. Many companies set price as cost plus. It is easier to figure out and often that is how competitors do it. Some business models are built that way. But most aren’t and shouldn’t be. Charge what the market will bear by understanding: the customer and their importance to you and your cost to serve them, the item and its value to each customer segment, and finally, the degree of price sensitivity to the item.
Pricing is not a foregone conclusion in any industry. You don’t have to do it like everybody else. Adjusting pricing to reflect value, regular incremental increases and understanding pricing sensitivity will, if you have a good product or service to offer, take you further faster. No more cost plus and irritating nickle and diming for basic services. In some ways it may be counter intuitive to charge what the market will pay instead of what the item costs–but hey, for many of you who have a strong value to offer that is a much more profitable strategy!
If you need assistance figuring out how to do that–please get in touch. If you have an interesting (or irritiating) pricing story to share–please do!