Customers care about prices. But they are certainly not the only thing they care about – and your business and marketing strategy should mirror that fact.
In other words, you should never compete on price alone. Instead you should start by making sure that what you are offering exactly meets the needs of your customers. And then you should sell it to them on the basis of “best value” rather than “lowest price”.
What is “best value”? As we see it, “value” is the gap between the benefits a customer perceives he is getting and the price he perceives he is paying. So offering “best value” means offering a bigger gap than anyone else.
The three keys to offering best value are to make sure that:
- Your products and services are exactly what your customers need and want – i.e. they offer the best and most appropriate combination of benefits;
- Your customers fully understand those benefits – i.e. because unless they understand that what you have to offer is special, they will assume it is average, and that means that you’ll only be able to charge an average price; and…
- Your prices are presented in the best possible light.
Get these 3 things right and customers will happily pay you more than ever before.
How do you cope with the fact that some customers are willing to pay more than others?
Economists tell us that the market price is set by supply and demand. We can show this graphically…
In the above graph, SP is your standard selling price. But the problem is that having only one selling price causes you to lose out in 2 different ways…
- for some customers that price is too high – so they don’t buy, and you lose them as a customer, and…
- for other customers that price is too low – so you end up charging them less (and earning less profit) than they are willing to pay. Which means you lose again.
Economists call the amount by which you lose in this second scenario the “consumer surplus” – and it is shown by the shaded area on this graph.
The consumer surplus represents the individuals who are both willing and able to pay more for your product or service than you are charging them.
One of the keys to dramatically improving your profits is to claw back some of this consumer surplus by charging different customers different prices. This is often called ‘price discrimination’. And this is exactly what publishers do with hardcover and paperback books.
Many people believe that hardcover books are about twice the price of paperback books because it costs twice as much to print a hardcover book. In fact the difference in production costs are minimal. Publishers have recognised that some people are prepared to pay substantially more for a book in order to buy it as soon as it is published. But more price sensitive consumers are prepared to wait for the paperback version.
Pricing according to the value you give
Many businesses set their prices using a cost-plus method. For example, many service businesses use hourly rates to set price. Cost-plus methods, such as hourly billing, can seriously affect your profit potential. And these methods are not in the best interest of your customers.
Some of the many disadvantages of this method of pricing include…
i. the interests of you and your customers are incompatible
ii. you focus on costs – not the value to your customers
iii. the customer takes the risk of your inefficiencies
iv. creates a production mentality – not an entrepreneurial spirit
v. focuses on effort – not results
vi. penalises technological advances
vii. rates are set by your competitors
viii. does not differentiate you from your competition
ix. limits your potential income
x. creates a bureaucracy of recording costs
Traditional cost-plus pricing starts by finding out how much it costs to produce the product or service. A mark-up is then applied to set the price.
Value pricing starts by finding out how much the customer values the product or service. This determines the price. It is therefore fairer to the customer.
Next – 14 ways to charge more without losing customers