Price vs Value-What’s The Right Price?
The key is to understand the fundamentals of pricing and what value you offer to your target market.
Of all the difficulties small business owners and providers face, one of the most challenging is setting their prices. What should you charge for your products or services? This is not an easy question to answer, but in this post, you’re going to learn a variety of methods that will help you not only pick a price but pick the right one.
Why it’s Important to Get the Price Right
If you undercharge for your products or services, then you’ll be losing revenue. Alternatively, if you charge too much, you could be losing potential customers and new sales. How do you get it right?
Having a pricing strategy will help you sell your products or services in the short-term and also increase your profitability over the long-term. The key is to understand the fundamentals of pricing and what value you offer to your target market.
Value vs. Price
We often use the words ‘value’ and ‘price’ interchangeably, but they actually mean two very different things.
Value is what a product or service is worth to the customer. Only the end-user can decide whether something is valuable to them or not. For example, you may sell hooks for $5, which is practically nothing in terms of price. But if the buyer uses that hook to hang up their highly-prized college diploma on the wall so all their neighbours can see it and admire their achievement, then the value to the buyer is much more than $5.
In earlier post’s, you defined your UVP, so you have an idea of how you can add value to your product or service with the extras you provide. If you haven’t I suggest to head back to that post and define the UVP first.
Popular Pricing Strategies
There are several pricing models commonly used to determine the price.
Cost-Plus Pricing
With cost-plus pricing, you work out all your costs, then add in a percentage for the amount of profit you want.
‘Costs’ means everything that goes into producing the product or service. It includes raw materials, labor, and overheads like rent, insurance, heating, employee benefits, and so on.
There are two kinds of costs to consider: fixed and variable costs.
- Fixed costs stay the same no matter how much or how little you sell (e.g. Office rent or employee salaries).
- Variable costs change and most rise as your sales increase. For example, raw materials (you need more of the raw materials to meet rising demand), extra labor (you have to hire additional workers), and shipping.
In pricing your products, you need to take into account that variable costs will change and make allowances for that.
Value-Based Pricing
We’ve talked a lot about value. Here’s a recap:
- By being clear on the value of what you are offering, you are helping the customer to see which product or service is best for them.
- This helps them to buy what best fits their needs.
- What you’re aiming for is to find the right fit between what you have to offer and what the customer really wants.
This is why you have to determine the value first and highlight what’s unique about your product. Then you can fix your price.
Competitor-Based Pricing
In this pricing model, you analyze your competitors and market conditions and set prices accordingly. This method can be effective because you’re charging the “going rate” for a product or service. If customers are currently buying something from a competitor for X amount of money, this indicates that this price is something they’re willing to pay.
When you decide on the price using this strategy you can choose to:
- Undercut, but make sure that any pricing covers your costs + profit; if not you won’t stay in business for long.
- Offer your product or service at a slightly higher price, but remember to emphasize the value.
Service-Based Pricing
When charging for services, like coaching or consulting, you have two options: hourly/daily rate (price for a fixed period of time) or project rate (price per project).
- Service providers often like hourly rates because you’re guaranteed that your labor costs will be covered by the buyer. For buyers, it’s harder to budget for.
- Buyers often like project rates. The price is for the whole project and there are no surprises. Service providers need to ensure their project contains everything they need to and how long it will take.
Choose Your Pricing Strategy
The nature of your business will usually dictate the type of pricing strategy you adopt. For example, a smartphone store won’t use hourly based pricing but an app developer might.
Here’s a way to get yourself thinking about pricing. Think of something you have bought in the last month or so. From a pricing perspective, ask yourself:
1. Why did you buy it?
2. Was it good value?
3. Are you loyal to the brand?
4. What differentiates them in terms of their pricing from others?
5. What can you learn from this for your own business?
Now you have some more of the information you need to make decisions about your own pricing policy.
Ask yourself:
- What are the pros and cons of each of the pricing strategies for my business?
- Which of these models will most help me price my product or service? Why?
- How will this pricing strategy enable me to meet my revenue targets?
- How will I monitor the effectiveness of my pricing strategy?
Finally — what will I price my MVP at? Remember: this may be a discounted price in exchange for feedback.
Pricing is an ongoing process. What works today may not work in 6 months’ time. You’ll need to revisit your pricing regularly.
Big Takeaways:
Pricing your products and services is one of the biggest decisions with a great deal of impact on your business.
Be careful not to lose revenue by under-charging for your products or services.
Pricing is ongoing. Once you set prices, continue monitoring and experimenting with
