In the first part of this series we looked at the effect prices have on profits. A change to the upside can have a wonderful effect on profits while reckless discounting and careless price reductions will surely have a disastrous one. If you don't fully understand the implications, or haven't read Part 1, go back and do so now.
By now you may be asking yourself, “What should my prices be?"
Before you go start changing prices, you need to clarify a core part of your overall positioning. You need a pricing perspective.
Do you want to be a low priced provider, or would you rather sell the premium product? There are good reasons for being a low priced seller. Just as Michael Dell - that's where he started, although he certainly isn't there now. Or look at Costco, or Amazon. If you look to these models for inspiration, make sure you have three things: a firm grasp on your margins, deep pockets, and the ability to do lots of volume. Without all of these three, you will surely go broke.
Where are you personally more comfortable? If you sell at the high end of your price spectrum, you are likely to attract higher end clients, and it would help to be comfortable in that rarefied atmosphere. On the other hand, you may feel better on the low end. It's a choice and you have to make it.
What will attract the type of clients or customers you want? Your price is a signal to your potential clients telling them who you are in the marketplace. And if your goal is to raise the quality of your clientele, the easiest way to do so is increase your prices.
Do you want a low service, volume business, or would you prefer fewer, select clients and give them “high-touch"? High-volume, low-touch businesses can be very profitable, and can generally scale more easily, but require more planning. Low volume, high-touch (select always means high-touch) businesses, may be easier to build and require less overhead. If you are thinking of a lifestyle business, go the latter route.
Do you want a quick in-and-out transactional business, or would you rather develop long-term, nurturing client relationships? If you want to build something easy to scale and perhaps sell down the road, high-volume, low touch may fill the bill. If you are developing a life style business to carry you into old age, or a “professional" business with a strong public image, think long-term and nurturing. Higher prices usually go hand-in-hand.
Develop a pricing perspective that fits your goals. Your decision will go a long way to determine who you do business with and how you do it, and will also effect how you can dispose of your business. There are no clear guides to the right choice. It's more a matter of preference and positioning.
But perspective is not the only element to pricing. By itself it will tell you how to price (high, low, middle of the road), but not the exact price itself. Before I share with you how to do that, let's examine a few common approaches to pricing.
As nuts as this may sound, lots of people price to pay the bills. No kidding. I've seen this advice in more than one article for professional service companies. “How much money do you want to earn? Divide that by how many hours you have to sell. . . " And so on. (By the way, cost-plus pricing is just as crazy. )
Price to time. This is what most services people do. They set their prices by the hour, or by the day. The biggest problem is this makes it way too easy for prospects to compare your price. It also puts them in control of your time if they do buy.
Price to competition. This is the most common form of pricing, and is the core of all prices based on market research. And it makes sense if your offer is comparable to that of your competitors.
One last common pricing structure is front-end or loss-leader pricing. Loss-leader pricing is not designed to generate operating profits. Its purpose is either to take market share from competitors or create customers to whom you will later sell other things.
If your goal is to drive your competitors out of business, and you have deep pockets to sustain an unprofitable price war, this can work brilliantly. Many big box retailers, including Staples and Home Depot have followed this strategy. Long years of low prices eventually crushed their competitors, and both raised prices when their markets thinned out.
If you have a profitable and expensive product or service, an effective approach is to sell something that is cheap. For instance, if you have a high-end seminar, a low end ebook or free consultation can bring in all the customers you want.
There are other considerations to pricing besides the bottom line. But if you want to understand how to increase your profits, stay tuned for Part 3.
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