Pricing your products and services is difficult because you may be relying old cost-based methods or mandatory ratios given to you by the finance department. If customers are complaining about your prices, it's because they don't understand the value they're getting for their money. If you are underpriced, you're foregoing valuable revenue.
- When I talk to marketing leaders, the subject of pricing almost always comes up. They lose sleep wondering if their prices are too high or too low. It's a constant ongoing challenge for every marketer. Of the four Ps of marketing, product, price, place, and promotion, setting prices is the quickest, but that doesn't mean it's the easiest. In fact, making a mistake here can be very costly in terms of lost revenue as well as sending the wrong signal to the market about your products and services.
How do you overcome this challenge? The key is to understand the role of pricing. Then you need to understand the most common pitfalls companies make when setting prices. Let's start with some definitions. To be successful at pricing, you need to understand the difference between a product's cost, its price, and its value. The cost of the product is all the direct and indirect expenses that you experience as the manufacturer to make the product. Things like raw materials and labor for example.
Price is what a consumer has to pay to acquire the product. A price is a signal, a piece of information. About what? You might ask. About the value. Value is what the consumer gets out of the product. The collective set of benefits delivered by the product. The most common mistake in pricing is setting it based on your costs. It may seem counter-intuitive, but price is unrelated to cost. Your customer doesn't care what it costs you to produce the product.
They don't compare your costs to what they pay. Instead, they compare what they pay versus the total value they get out of it. If value exceeds the price, then they'll buy the product, but if not, they'll ignore it. Value-based pricing then, is the process of calculating the total delivered value from using the product, and then setting the price at or just below that amount. Think of price as a shortcut. The price quickly tells a customer a lot about the quality and value.
Hey, but what about the competition and their prices? Well, first, look at your value proposition. If you're positioning your product as superior to the competition, then you should set the price higher than theirs. If your product is equivalent to the competition, make the price the same. If your product is inferior to the competition, set the price lower. That's how price becomes a signal of value when compared to a competitor. Now, pricing can be a very touchy subject, because everyone in your company will have an opinion about it.
Sales teams tend to want to lower prices, because it makes their job easier. Finance teams tend to want higher prices to cover the fixed costs. They're driven to meet targets around profit margins, but you as the marketing leader need to take a customer-centric view and not be unduly influenced by your colleagues in other departments. Focus on value and see pricing as a way to help customers understand what your products and services are truly worth. Hey, people don't mind paying higher prices if they get high value in return.
In my experience, price is without a doubt one of the top ten marketing challenges for any business. The trick is to balance financial impact with good common sense about customers' expectations.