Customers decide to buy based on their perception of the value they’re receiving for the price they’re paying. Whatever you charge for your product, that price must reflect what your customer thinks your offering is worth. If nothing distinguishes your product, it falls into the category of a commodity, for which customers are unwilling to pay extra.
Related: How to price your product or service
If a customer thinks that your price is too high, expect one of the following:
- The customer won’t buy.
- The customer will buy but won’t feel satisfied with the value, meaning you win the transaction but sacrifice the customer’s goodwill and possibly the chance for repeat business.
- The customer tells others that your products are overpriced.
Before you panic over a customer calling you high-priced, keep in mind that the dissatisfied customer’s negative word-of-mouth is only bad news if others respect the person’s opinions regarding price and value. You’re often better advised to lose the business of a cherry-picking bargain hunter than to sacrifice your profit margins by trying to price to that person’s demanding standards. If your prices are on the high side, though, be certain that the quality, prestige and service – the value – that you offer is commensurate with your pricing. Also, realise that you can under-price your offering as well. If a prospect thinks that your product is worth more than its price tag, expect one of the following:
- You may sacrifice the sale if the prospect interprets the low price as a reflection of a second-rate offering.
- You may make the sale, but at a lower price (and lower profit margin) than the customer is willing to pay, leaving lost revenue and possibly customer questions following the transaction.
- The customer may leave with the impression that you’re a discounter – a perception that may steer future opinions and purchase decisions.
Unless you aim to own the bargain-basement position in your market (a dangerous strategy because some other business can always go lower), you’re better off providing excellent value and setting your prices accordingly.
Calculating the value formula
During the split second it takes for customers to rate your product’s value, they weigh a range of attributes:
- What does it cost?
- What is the quality?
- What features are included?
- Is it convenient?
- Is it reliable?
- Can they trust your expertise?
- How is the product supported?
- What guarantee, promise or ongoing relationship can they count on?
These considerations start a mental juggling act, during which customers determine your offering’s value. If they decide that what you deliver is average, they’ll expect a low price to tip the deal in your favour. On the other hand, if they rank aspects of your offering well above those of competing options, they’ll likely be willing to pay a premium for the perceived value.
Customers match high prices with high demands. Remember the sign you used to see in print shops and garages? ‘Price, quality and speed – choose any two’? How times have changed. Today’s customers expect the companies they buy from to offer price, quality and speed. But here’s the good news: They expect you to be competitive in all three areas but exemplary in only one. Here are a few well-known examples:
- Costco = Price
- John Lewis = Service
- Tesco = Convenience
- FedEx = Reliability
- BMW = Quality
Riding the price/value teeter-totter
Price emphasises the money spent. Price is what you get out of the deal. Value is what you deliver to customers. Value is what they care most about and what your communications should emphasise.
When sales are down, or customers seem dissatisfied, small businesses turn too quickly to their pricing in their search for a quick-fix solution. Before reducing prices to increase sales or satisfaction levels, think first about how you can increase the value you deliver. Consider the following points:
- Your customer must perceive your product’s value – or the worth of the solution your product delivers – to be greater than the asking price.
- The less value customers equate with your product, the more emphasis they put on low price.
- The lower the price, the lower the perceived value.
- Customers like price reductions way better than price increases, so be sure that when you reduce prices that you can live with the change, because upping prices later may not sit well.
- Products that are desperately needed, rarely available or one-of-a-kind are almost never price-sensitive.
Penny-pinching versus shooting the moon
Tell a person he needs angioplasty surgery, and he’ll pay whatever the surgeon charges – no questions asked. But tell him he’s out of dishwasher tablets, and he’ll comparison shop. Why? Because one product is more essential, harder to substitute, harder to evaluate and needed far less often than the other. One is a matter of life and death, the other mundane. See Table 3-1 to determine where your product fits on the price-sensitivity scale.
|Table 3-1 Price Sensitivity Factors|
|Price Matters Less if Products Are||Price Matters More if Products Are|
|Hard to come by||Readily available|
|Purchased rarely||Purchased frequently|
|Hard to substitute||Easy to substitute|
|Hard to evaluate and compare||Easy to evaluate and compare|
|Wanted or needed immediately||Easy to put off purchasing until later|
|Capable of providing desirable and highly beneficial outcomes||Hard to link to a clear return-on-investment|
|One-of-a-kind||Ten a penny|
Evaluating your pricing
Give your prices an annual check-up. Here are factors to consider and questions to ask:
Your price level: Compared to competitors’ offerings, how does your offering rank in terms of value and price? How easily can the customer find a substitute – or choose not to buy at all?
Your pricing structure: Do you include or charge extra for enhanced features or benefits? What promotions, discounts, rebates or incentives do you offer? Do you offer quantity discounts? Does your pricing motivate desired customer behaviour, for example by offering a discount on volume purchases, contract renewals or other incentives that are factored into your pricing to reduce hesitation and inspire future purchases?
Pricing timetable: How often do you change your pricing? How often do your competitors change their pricing? Do you anticipate competitive actions or market shifts that may affect your pricing? Do you expect your costs to affect your prices in the near future? Do you need to consider any looming market changes or buyer taste changes?
Customers resist or barely register price rises. Their reaction largely depends on how you announce the change. One of the worst approaches is to simply raise prices with a take-it-or-leave-it announcement. Far better is to include new pricing as part of a menu of pricing options, following these tips:
Accompany price rises with lower-priced alternatives. Examples include bulk-purchase prices, happy hour or low-season rates and bundled product packages that provide a discount in return for the larger transaction.
Announce a new range of products instead of simply high- and low-priced options. Research shows that, though customers often opt for the lower of two price levels, when three price levels are provided, they choose the mid-range or upper level rather than the least expensive.
Give customers choices by unbundling all-inclusive products. By presenting product components and service agreements as self-standing offerings, customers can self-tailor a lower-priced offering.
Give advance notice of price increases. In service businesses, don’t make customers discover increases on their invoices. Allow them time to accommodate new pricing in their budgets. In retail businesses, give customers the opportunity to stock up before price rises take effect.
Believe in your pricing. Especially when you raise prices, be certain that your pricing is a fair reflection of your product’s cost and value. Then instil that belief throughout your business.
Related: Understanding profit margins