If you’re a business owner, pricing is likely one of the most important aspects of your business. However, it may not be for the reasons you might think.
Clients do pay attention to pricing, but it’s not necessarily the main factor contemplating a business or service. Pricing is important, however, that doesn’t mean you should aim to have the lowest prices.
“Give them quality. That is the best kind of advertising.”– Famous chocolatier Milton Hershey
In that statement, we find a key component of a successful pricing strategy: Value trumps low prices.
Clients typically aren’t interested in how low of a price they can pay if the quality of the product or service is subpar. In fact, they’re often happy to pay more for a product or service if they know they’re getting value in the product or service.
When you modify your approach to pricing, you can get on the fast track to avoiding pricing mistakes. Start pricing your service or product in a way that is sure to grow your business exponentially.
Are You Making These Common Pricing Mistakes?
There are three main pricing mistakes that impact business owners as they work to price their services and products in a way that brings maximum profit. Are you making one or more of these common pricing mistakes?
1. Confusing Revenue And Profit
Revenue and profit are two different things, and business owners must understand the difference if they’re going to price successfully. Having a target profit for your business is important, but in addition, you need to know how you’re going to arrive at that target profit number.
In the world of business ownership, just because you get $100,000 in sales doesn’t mean you’ve earned $100k. Business owners have to create target profit numbers based on financial equations that take into account their business operating expenses.
Let’s take a look at more accurate income equations based on whether your business provides a service or a product:
Product-based business: I earn $100,000 in revenue – taxes – overhead – web hosting – e-commerce – product costs, etc. = $50,000 in the bank.
Service-based business: I earn $100,000 – web hosting – gas – marketing – insurance – internet, etc. = $90,000 in the bank.
This may sound like common sense, however many business owners are perplexed at why they make $100k but only have $90k in the bank.
Determining Your Profit Based on Your Income and Expenses
Revenue is the amount of income your business generates. Profit is the amount of money that’s left over after expenses, costs, and taxes are considered.
Yes, you need to consider taxes too. In fact, it’s a good idea to set aside a percentage of your revenue and designate it specifically for paying taxes. Doing so will help you avoid being short when you need to pay Uncle Sam at tax time.
Let’s say you want to earn $100,000 in your business. If so, you need to figure your business goals in a way that accounts for taxes and expenses. Take the case of the product-based business owner mentioned above. She would need to make closer to $160,000 in revenue or more in order to end the year with $100,000 in her bank account.
Having a clear grasp on how to differentiate between revenue and profit is key. It allows you to adjust your business’ sales strategy to align with your income goals.
2. Forgetting To Count Non-Revenue Generating Hours
As you determine the expenses that equate to your business’ profit, it’s important to include non-revenue generating hours.
When asked to put in variables about work time hours, people often say something like “I’ll work 40 hours a week, five days a week, 48 weeks of the year just like I do at my current job. Therefore, if I want to make $60,000 a year, I’ll have to charge $31.25 an hour”:
Income/Hours per week*number of weeks = hourly wage
$60,000/(40 hours*48 weeks) = $31.25.
The equation seems fairly straightforward. If you’re working your business in this manner with the above-mentioned monetary goal, it appears you need to charge $31.25 per hour. The problem with this is that it fails to take into account the time you will have to spend working on your business vs. working in your business.
Revenue generating hours are the hours you put in as you work in your business. Non-revenue generating hours are the hours you put in as you work on your business.
When you are working in your business, you are using your expertise to generate revenue, add value, and move the business forward.
When you are working on your business, you are doing all the non-revenue generating things that must occur in order for the business to run and keep clients coming in the door: bookkeeping, continuing education, email, networking, marketing, etc.
If we assume you will be spending 10 hours per week working on your business doing non-revenue generating activities, then you are actually working 50 hours a week instead of 40.
This means your effective hourly rate is $25, not $31.25, provided you’re using the same formula.
Including Non-Revenue Working Hours to Get to Your Salary Goal
Therefore, the reality is you have two choices if you want to make $60,000 a year:
- Continue charging $31.25 and work more hours.
If you are comparing running your business to working your old job, then you are effectively working 10 hours a week for free.
You are working 40 revenue generating hours and then in the evenings, you are putting in another two hours a day on non-revenue generating tasks. This is what a lot of people do, and it can be a big contributor to the “I make X, but I never quite seem to get ahead” mentality discussed above. You’ll quickly burn out.
- Work the same 40 hours but charge more per hour.
In this case, if you spend 10 hours a week working on your business and 30 working in it, then your hourly rate will be $41.67, not $31.25.
Comparing this to your old job, you’ll be working and earning the same as before. If you have a big project come through or need to work a little extra once in while to develop a new offering you have the space to do that. You don’t start the week totally maxed out.
The moral of the story here is that you’ve got to factor non-revenue generating hours into your profit and loss goals. If you don’t, you’ll continually have less money than you want to each year. And that’s a key component for business failure.
3. Not Offering A Variety Of Options
While too many options can be overwhelming to clients, not offering enough options can be just as detrimental. Whatever you sell, whether it be tax services or cleaning supplies, having a variety of options that can cover a range of client needs is a smart move.
The goal? Offer services or products that can cover a variety of client needs–and budgets. Having a low cost of entry option allows potential clients to try your services out without a large commitment. A free trial or sample is totally risk-free for the customer may be just the push they need to close the deal.
Almost all businesses can offer some sort of sample size item. For example, a photographer could offer 15-minute “mini” sessions and book several of them back-to-back. She gets a chance to show off her skills, clients get affordable pictures, and yet the photographer still maintains her hourly rate.
It may be tempting to avoid offering lower-end cost services or products, but don’t be put off by them. The client that can only afford your basic service package may grow his business to one day to become your biggest client.
So, you’re aware of common pricing mistakes. Knowing familiar pricing strategies can help you avoid those mistakes.
Understanding The Different Pricing Strategies
Understanding different pricing strategies is vital to a successful pricing approach. Are you familiar with the pricing strategies mentioned below?
Premium Pricing Strategy
Premium pricing involves pricing in a way that helps the client perceive the extra value in a product or service. There is a story in Influence by Robert Cialdini about a man who owned a jewelry store. He had quite a bit of turquoise jewelry that wasn’t selling. As he was leaving on vacation he told his assistant to mark the turquoise jewelry at half price.
Upon his return, he happily noticed that all the turquoise jewelry had sold. After speaking with his assitant it was discovered that the assistant had misheard. She hadn’t cut the price in half… she had doubled it!
The previous low price had been causing customers to worry about its quality.
Here’s a great article that goes over all the reasons to sell a high priced item.
Economy Pricing Strategy
Economy Pricing is geared toward cost-conscious clients who are seeking the most bang for their buck. Think Sam’s Club, Walmart or Target shoppers.
These clients might need to have economy priced products and services, or they may just be very frugal.
Bundle Pricing Strategy
Bundle Pricing is pretty self-explanatory–it involves giving clients a discount if they purchase multiple products or services.
Many internet and cable companies practice bundle pricing. For instance, my internet company gives me a discount on their pricing because I have landline phone service with them as well as internet service.
Insurance companies will often give you a discount if you have both home and auto insurance with the same company.
This can help turn your small clients into bigger clients.
Psychology Pricing Strategy
Psychology pricing is meant to create a perception of value to a customer. That might mean pricing an item at $199 instead of $200.
There is an interesting article by Neil Patel that discusses five psychological pricing studies. It’s interesting. One study looked specifically at the number nine, as in $199 vs $200, and found it to be quite powerful. Especially when used in connection with a sale. For example. $69 marked down to $49 will sell at a much higher rate than the same product priced at $50.
Value Pricing Strategy
Value Pricing simply involves selling your product or service at a price clients think is a good value. Much of the success in Value Pricing is in how you market your goods or services.
Another strategy discussed in Neil Patel’s article mentioned above is the power of a “useless” price. Let’s go back to our photographer example, a useless price might look something like this:
- Digital photos only: $79
- Printed photos only: $139
- Printed and digital photos: $139
It would seem that the price for printed photos only is useless. Who would not take the digital photos for free? But that extra price point makes it seem that the package deal is an excellent value.
Another thing to keep in mind when pricing for value is to build the value first, before revealing the price. You’ll want the client to know exactly what they are getting. You want them to be thinking “yeah, I want this.” before they know the price. If they know it’s an amazing quality item or service they will be thinking ahead that it’s going to be expensive. When they find out it’s actually quite reasonable, how can they not buy it?
So, as a business owner, how do you know which pricing strategy is best for your business?
Which Pricing Strategy Is Best For Your Business?
The answer to that depends a lot on the type of business you run. This brief summary can give you some perspective on which pricing strategy might be best for you.
Premium Pricing can be good for your business if you’re selling upscale products or services. If your business is geared toward high-end clients, offers upscale services or products or is expensive, you’ll want to use a Premium Pricing strategy that ensures clients are aware that your products and services top the competition.
Economy Pricing can be good for your business if you’re targeting a client or a customer base that loves a deal. Warehouse club shopping is one example of how this can work. You’ll have to have a product or service that can sold in high volume if you want to make a lot of money with this pricing strategy.
Bundle Pricing can be good for your business if you run a business that offers multiple services or products that work well together or compliment each other. For instance, a landscape business owner can offer a discount if a client uses them for lawn care and snow removal.
Psychology Pricing can be good for most any business, as long as you use it in a way that fits your business. You may have to do quite a bit of testing to figure out how to make this work for your individual business and clients.
For example, if you are selling at a high price point to an upscale clientel you may find that skipping the “power of 9” may work in your favor. This article Entrepreneur discusses that round numbers actually sell better since the $199 can feel like its a discounted item. If you are going to prestige you don’t want a “discount” feel.
However, if your business and clients do prefer a discount then having a sale, even a fake sale, may get the job done.
Value pricing is core for any business. Whether you sell upscale products and services or economy products and services, clients must believe they’re getting value for the price.
If a client doesn’t believe they’re getting their money’s worth, they’re more likely to find another provider.
How Value-Pricing Can Give You the Edge
As mentioned above, offering the best value for your clients means creating an overall experience that makes them feel satisfied and valued. There are three common criteria used to achieve this goal.
- Products and deliverables
Timing: Delivering work on time or early can go a long way toward making a client feel valued and toward making you stand out from the crowd. When was the last time you got something from someone early? It doesn’t happen very often and it’s never forgotten when it does happen.
Consistency: Maintaining the same level of service throughout the relationship. This may seem like a no-brainer, but it’s amazing how many times we inadvertently favor new sales over consistent clients.
Beware Of Favoring New Sales Over Existing Clients
Think discounts for new customers, putting off doing work for current clients while trying to land a new bigger one, or even something as simple as an author who asks her list to buy her new book for $9.99, then offers it for sale for $.99 a month later because she wants more sales.
As this infographic from invesp.com explains, it costs five times as much to attract a new customer as it does to keep an existing one. Think about this the next time you are tempted to offer a special deal to a new client. It may be better to offer it to an existing client instead.
Products And Deliverables: We said earlier that being the best value usually doesn’t mean being the cheapest.
For instance, the basic frame of the Cadillac Escalade and the Chevy Suburban are almost identical. When you compare the two, Escalades have similar engines, less seating capacity, and get worse gas mileage, yet sell for approximately $25,000 more. Why? Because of the status they convey and the perception that the finishes are higher quality, they are seen as more valuable.
Parker Warby, the glasses company, had trouble selling their discount glasses. So they doubled the price and offered to donate a pair of glasses for every pair sold.
Whether this is right or wrong doesn’t really matter. What matters is what the client perceives and experiences. What they get is not limited to the deliverable itself, but the experience of obtaining and owning that deliverable.
Pricing your business’ offerings in a way that attracts (and keeps) the types of clients you seek is vital. Ensure that your pricing strategy works to deliver value to your client base. Your strategy has to make it clear why you are the best choices for their needs.
When your client experiences a seamless customer experience every time, they’re more likely to remain loyal to your business.
If you want help pricing your services, Cloud Friday offers Advisory Services that can help any entrepreneur make better decisions in their business. Check out all our services here.