If you sell products or services, you probably grapple every day with one of the most challenging issues faced by business owners worldwide: How much should I charge? This is often the major factor in business that makes every other factor pale in comparison. If you price your product or service “right, ” you will pave a golden path to your own success and leave your competitors far behind.
Price is the index that most customers use as perceived value. Some customers are comparison shoppers always looking for the lowest prices and will buy wherever they are able to get the lowest price. Some customers are not looking for the lowest prices but are looking for other benefits. While other customers are actually attracted to the highest prices, as they perceive a higher price to mean higher quality and exclusivity. Finally, there are customers who rarely do shopping based on price, but rather, rely on recommendations from friends, television commercials, or they look for “special sales. ”
Whichever type of customer you’re dealing with price is always a consideration, which makes price-setting often the most difficult matter for the business owner to address. As a business owner you not only want to maximize sales, but you also want to turn the maximum profit on sales as well. This is why business owners always feel that they have to make a choice between great sales volume at small markup and less volume at a higher markup.
Because of today’s global competition many business owners operate under the premise that they have to sell at bargain prices. They feel that in order to get the maximum number of sales they can only have a minimum markup.
But this is not necessarily true. Studies have shown that businesses that offer the lowest prices do not always achieve the highest sales volume because there are many other factors involved in a buying decision.
So what’s the first step in setting the right price for your product or service? The first step is to know exactly what type of product or service you are offering. Are you offering people a price-shopped product or service, or one that is results-shopped. The distinction is critical. Price-shopped items are essentially commodities, things, such as the items you’d find at a grocery store. People buy things wherever they find the lowest price.
A results-shopped item is totally different. If your customers are looking for a particular result, a certain sense of fulfillment or inner satisfaction, then you as a business owner have much more flexibility, and a better chance to make a nice profit when setting your prices.
You should always try to move your business toward the “results-shopper business category and away from the price-shopper category. But sometimes you are at least temporarily trapped in the commodity pricing structure. If you must price low, then it is to your advantage to price even lower than your competition, but when you do this make your low price contingent upon the customer buying some other product or service, or some combination of services or products, that have small profit margins.
With pricing you always need to remember that you might have to be a commodity in the first part of a transaction, but not beyond that point. For example if you offer a product that is heavily price shopped, then offer a bigger package. Refuse to compete on a commodity basis. If your competition is selling an item at a certain low price, then don’t sell that item alone. Instead package several of them together at an incredible price, a price where you can get a purchasing advantage in quantity, and one you use to make a good profit while offering your customers superb value.
The most important thing with pricing, is to always test. Often times you’ll discover that you’re under priced out of nothing more than intimidation from your competitor‘s pricing. The market will always tell you whether or not you’ve priced your product or service right
Always be willing to stretch and expand a deal, even if your have to bid competitively. For example suppose you’re bidding on a job that calls for painting a building, and you make it a package bid, one that also includes stripping, caulking, waterproofing, etc. If your combined price is much lower than the separate bids they’ve gotten from others to paint the building, then you will not only land the job but make a good profit as well.
Unless you’re willing to price in a innovative proactive and inventive way, you’ll always be at risk of selling products at less than you pay for them. You’ll always be at risk of losing profits and going out of business all together.
Most businesses fight price wars just to generate customer traffic. But unless you have a well-strategize plan of action behind what you’re doing, you can’t possibly profit from a price war. In fact, in most price wars, nobody wins.
Instead of rushing into a price war, you should instead position your customers to make repeat purchases from you. You should do this when the customer makes his or her first purchase, and then make sure that the additional things he or she buys from you aren’t being sold at a loss, or at only a small profit. You’ll often find out that you don’t have to discount as deeply and as broadly as you originally thought.
Customers can be tough, demanding, and difficult at times but rarely will they deny you the opportunity to make a profit. More often than not, business owners psych themselves down the price scale.
It would be tragic if you found out by testing that you’ve been denying yourself 50% more profit on half or three -quarters of the services you sold just because you were afraid to ask customers to pay what the items were worth to them.
This is why you must test your pricing. Never leave your prices to chance. You’ve got too much to lose or gain. And in business you always have to be gaining.
Copyright© 2005 by Joe Love and JLM & Associates, Inc. All rights reserved worldwide.
Joe Love draws on his 25 years of experience helping both individuals and companies build their businesses, increase profits, and achieve total success. He is the founder and CEO of JLM & Associates, a consulting and training organization, specializing in personal and business development. Through his seminars and lectures, Joe Love addresses thousands of men and women each year, including the executives and staffs of many of America’s largest corporations, on the subjects of leadership, self-esteem, goals, achievement, and success psychology.
Reach Joe at: firstname.lastname@example.org
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