Pricing as a Product Lever

Time invested in planning your pricing properly pays off more handsomely than pulling on the other growth levers available to you.

How do you define growth? More customers? More unit sales? More revenue? For this discussion we’ll focus on the bottom line and agree that more profit is the most important growth metric. Even if you disagree, it is certain that this is true for your company’s stakeholders.

You do have several levers available to adjust in your effort to increase profits and achieve growth: You can examine your fixed costs to identify areas in which they can be reduced. You also have variable costs you can probably push downward. The other lever is marketing. More marketing, done well, should yield increases in sales volume. But there’s another lever available to you, and it’s often avoided simply because getting it right is a complex process. Getting pricing right—in the right way—is totally achievable.

According to pricing experts ProfitWell, “Pricing is the most important aspect of your business. No other lever has a higher impact on improving profits. A 1% improvement in price optimization results in an average boost of 11.1% in profits.”

The trick is to price properly.

Pricing Properly

Proper pricing strikes the balance between that which optimizes your profit production without exceeding what your customers will pay for your product or service. In this case, great opportunity comes with great responsibility.

Striking that balance takes time, research, and planning. Yet, many companies set their prices somewhat arbitrarily. There are several ways in which prices can be calculated, but here are the three primary methods:

Cost-Plus Pricing

This is the simplest approach. Take your fully burdened cost of goods or services and add the profit margin you wish to achieve. The problem with cost-plus pricing is that it’s completely introspective. It only looks at you and your company. Your cost. Your desired profit margin. It doesn’t take the customer into account at all, and that’s always a mistake.

Pricing Against Competition

Welcome to the danger zone, my friends. Many business owners, particularly in the SMB, are constantly checking their competition’s pricing and making sure theirs is lower. In many respects, that puts your competitors in charge of how much money you can make. Even worse, it positions you as the low-price competitor. Many customers have become highly suspect of those who compete solely on price, figuring they have no other basis to compete on.

Value-Based Pricing

Let’s start out by clarifying that this leverages your customer’s perception of your product or service’s value to them, not your estimate. This is something you need to research, study, survey, or otherwise learn before you can get it right. Your biggest danger is that you may find that it costs you more to produce your product or deliver your service than the value your customers perceive and are ready to pay for. That’s back-to-the-drawing-board time.

Developed properly, quality sales pros can always close sales to customers with value-based pricing. Perhaps not every customer, but those who put value on value will welcome a price that aligns with their expectations.

Solving for Pricing Complexity

There are several things you’ll need to do in order to get your value-based pricing right so you hit that magic balance where you generate your desired profit margin and customers readily buy.

Know Your Customers

One of the bonuses available from undertaking this process is that you’ll quickly discover that some of your customers may not really be good customers. A customer who values low price above all else is not a sustainable one. They cost you more than you’ll ever earn selling to them. It may soon be time to cut the cord. Remember that cutting off a loss is a good thing!

Go back to Pipeline Forecasting 101. The best way to more accurately forecast a customer’s upcoming purchases is to ask them. Just that simple. Your good customers will gladly answer your questions to the best of their ability. And asking how they value your products is a great way to show them you care.

Collect Customer Data

This may simply take the form of interviewing a sufficient sample of your customer base to explore what they feel the value of your product or service is. Talk about the return they’ve enjoyed on their investment in you in the past. Consult their purchase history to learn more. The more data you collect the better your price targeting will be.

Use Analytics to Seek Trends

If only you could obtain a direct and honest answer to the question, “What is my product worth to you?” But that’s not going to happen, so you need to figure out that value by analyzing all the data you’ve collected.

Expect that you’ll need to do some testing and may need to adjust here and there, but value-based pricing creates the most genuine exchange between you and your customer, demonstrating that you have customer relationships you can depend upon even during difficult times.