The art and science of product pricing strategy
Key points in this article
- Under-pricing your products or services
- Over-pricing your products or services
- Setting prices using your own data
There is one thing that every small and medium sized business has to do whether they like it or not. They need to put a price on their products and services.
For a lot of SME's, the typical approach is to ask the finance people what it costs to provide the service, adding on a desired profit margin and hoping for the best. While this approach may be financially prudent, there are two huge risks and they are:
- under-pricing and
Under-pricing commonly goes by the overused cliché of ‘leaving money on the table’ – which basically means that customers see more value in your product than you are capturing in your price.
Despite the fact that it’s easier to decrease prices than increase them, an under-pricing situation can be reversed.
Under-pricing involves selling your goods or services for less than they’re perceived to be worth
Over-pricing occurs when the price charged exceeds the value received, and is a common symptom of cost-plus pricing. At the end of the day, customers don't care about what their suppliers' costs are: they care about the value they receive.
Over-pricing involves selling your goods or services for more than they’re perceived to be worth
How should you go about setting prices?
Pricing is a combination of art and science, not one or the other. Customers are analogue and biological, not digital and mechanical, which is where the artistic side of pricing comes into play.
Having ‘the right product in the right place at the right time’ involves designing an optimal features and benefits-based product ladder, and ensuring your customers can purchase your product:
- where they need it, and
- when they need it.
An artistic approach
An artistic approach should also be adopted to illustrate why your product (and thus your price) is different from your competitors.
A scientific approach
A scientific approach to pricing builds on the ‘right product, right place, right time’ paradigm. When deciding what price to charge, it’s important to have:
- intuition and gut-feel, and
- hard data that’s been internally or externally sourced.
Developing your own data
The other quantitative approach is to develop your own data and work out how your products or services:
- increase customers' revenue
- reduce their costs
- minimise their risks.
Then use this as the foundations of your business’s pricing.
Remember to build up your own data as your business begins trading
A value-based approach to pricing ensures you are providing ‘the right product in the right place at the right time at the right price.’ It will get you closer to that perfect price than any other approach to pricing.