Pricing: The Key to Unlocking Your Business Potential

Pricing Strategies

Pricing The Key To Unlocking Your Business Potential

Pricing is a massive topic that goes beyond just one blog post. Honestly, I could write a whole book on it (stay tuned) since I spend more time on pricing with clients than any other area of finances. This post will give you a high-level overview of the issues and some solutions to the pricing dilemma. We'll dive deeper into specific areas in future posts (or maybe in that book…).

Getting your pricing right is crucial. It’s often the root cause of many problems small businesses face. If your pricing is off, it leads to a lack of profitability and cash flow issues. This means you can’t afford to hire the staff you need, leading to more hours for you, mistakes, cut corners, and ultimately, a drop in service or product quality. Sales drop, churn increases, and you spiral until you either have to increase your prices drastically or close shop, fearing that clients will leave and you’ll never sell at a higher price again.

But here’s the thing: when you do increase your prices, one or two clients might grumble, but they’ll likely stay. Most clients (around 90%) will accept the increase without blinking, and you might lose one or two of the lowest payers, who were probably the biggest hassle anyway. You end up with fewer clients, less work, but higher revenue – all of it pure profit.

I know this because I’ve seen it play out time and time again, including in my own business.

Pricing can destroy your profit margin if done wrong but is the quickest way to fix it.

The Balance of Pricing: Science and Art

Getting your pricing right takes work. It’s a delicate balance between science and art. The psychological aspect of pricing is not black and white. Business owners often undervalue themselves and the services they provide, fearing higher prices.

The Science of Pricing

Firstly, your pricing needs to deliver a decent profit margin. Start by figuring out what pricing works for your business, then look at how to position this pricing and the value the product or service delivers. You can’t just set sky-high prices if you’re not delivering value or if the market can’t sustain those prices. Conversely, having a price that looks great but doesn’t make any profit is equally problematic.

For example, I spoke with a business owner last week who needed to increase their price. They provided excellent service, were over capacity, and had a long waiting list, yet they weren’t making enough profit. A prime candidate for a price increase!

Common Pricing Methods

  1. Cost-Plus Pricing

    • Start with your Cost of Goods Sold (COGS) and add a markup for profit.
    • For instance, if COGS are £50 and you want a £50 gross profit, sell for £100.
    • This method works well for product-based businesses but is less effective for SaaS businesses with minimal COGS.
  2. Competition-Based Pricing

    • Focus on what others are doing in the market, possibly undercutting or positioning at mid or top-tier.
    • Keeps pricing dynamic but could lead to unprofitable pricing if not careful.
  3. Value-Based Pricing

    • Focus on the perceived value to the client rather than time or cost to deliver the service.
    • Effective in service-based businesses but can be challenging to identify perceived value.
  4. Other Pricing Methods

    • Dynamic Pricing: Prices change constantly (e.g., airlines, Uber).
    • Freemium Pricing: Basic free version with chargeable upgrades (common in SaaS).
    • Penetration Pricing: Lowest in the market to gain a share.
    • Price Skimming: Start high and lower over time (common in tech hardware).

A combination of different methods is usually the best approach.

The Art of Pricing

Ultimately, pricing boils down to two options: beat your competitor’s price or beat your competitor’s value. Competing on value is often the better choice. The tricky part is that value can be hard to measure. It’s about perceived value from the customer’s viewpoint, which can be influenced by how the service or product is packaged and positioned.

Conclusion

Pricing forms the bedrock of your business’s financial health, profitability, and growth. It’s a fine balance between art and science. Crafting a pricing strategy that safeguards your bottom line, resonates with your customers, and propels your business forward is crucial. I’ll delve deeper into specific pricing aspects in future posts. Until then, keep pricing with purpose and courage, and remember, the value you bring to your customers is worth every penny!