In our Fall 2019 issue, business advisor Phil Symchych started a discussion on the ‘Six Keys to Sustainable Business Growth,’ which has inspired a series. In his third article of the series, he takes a look at pricing and what it means for your business.
My first job as a kid was mowing lawns. I quickly learned that straighter lines and neater yards paid more. Price didn’t sell my work, quality did. Not much has changed.
Did you know the accounting method of determining price—taking your actual material and labor costs and adding a profit markup—is a terrible way to price your goods and services? As an accountant, I was trained in this ineffective mathematical method. However, there are other mistakes people make in pricing. In this article, we’ll discuss the mistakes and how to use pricing to increase your success.
The four most common pricing mistakes I’ve seen and helped companies overcome are:
- Pricing based on input costs of time, materials, overhead.
- Pricing based on competition…who also use input costs.
- Pricing ignores your contribution to the customer’s results.
- Pricing ignores the customer’s Return On Investment (ROI) from doing business with you.
To overcome these mistakes, I help clients analyze how their customers use the products and services, how they impact their customer, and what results they create for their customers’ business or personal lives. These results are both objective and subjective.
Pricing is, and should be, a marketing function, not a mathematical one. As a consultant, I tell my clients that pricing is powerful to create interest, differentiate, and demonstrate value.
Since we all know we get what we pay for, we want to avoid a low price that implies low quality. Personally, I don’t use the cheapest lawyer, photographer, or hair stylist. A higher price also differentiates you from competitors and strengthens your brand. Mercedes and BMW have high price points and strong brands.
Pricing helps to demonstrate your value. But first, you must educate customers on the value you create for them. For example, say, “We are more expensive than our competition, and here are six reasons why we’re a better investment and provide …(higher value, less risk, and/or your value proposition).”
Let’s define value. In a business-to-business relationship, a good transaction provides value to your customer in four quadrants. These are based on the following financial/non-financial and business/personal matrix.
Use the table to evaluate your product/service value created for your best customers. This exercise will demonstrate why you’re the best choice in these important categories.
The ultimate value is helping your customer achieve their desired results.
- What results do you help your customers to achieve?
- How can you quantify these results?
- What is your customer’s ROI?
Just like when your lawn is cut perfectly, having someone else do the work saves you the labor and still gives you the satisfaction of a nice yard. The ultimate power of your price is to help you educate your customers on how they will achieve a positive ROI—in all four value quadrants—when they buy from you.