Setting your pricing strategy is one of the most important things you’ll do as a small-business owner.
Actually, it’s probably THE most important thing you’ll do.
Because let’s face it, we work in order to earn … and how much you earn – and how hard you have to work – in order to earn that, all comes down to WHAT you charge.
Or I should say, HOW you charge.
Which is … your pricing strategy.
What Are Your Pricing Strategy Options?
Loosely speaking there are three main pricing strategies that businesses adopt when setting their prices:
1. Cost-based pricing: You work out the cost of what you’re selling, and you add a margin.
2. Competitor-based pricing: You look at your competitors’ prices, and set yours at a similar level.
3. Value-based pricing: You price based on the value you bring to your customers, and what they think that value is worth.
In reality, all have their pros … and all have their cons … but value-based pricing is always the winning strategy, and I’m going to show you why.
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The Disadvantages of the Cost-Based Pricing Strategy
A cost-based pricing strategy does make sense. You need to ensure you’re covering your costs, so you take those as a starting point, and then add your “profit”.
If you were selling a product, let’s say a dress, you’d calculate all the costs of making – and selling – that dress, and then you’d add a mark-up.
For service-based businesses, beyond your basic operating overheads, the biggest “cost” usually, ultimately, comes down to your time … so cost-based pricing is essentially your hourly or day rates.
The biggest disadvantage of this type of pricing strategy? You have a fixed, rigid profit margin … so you’ll always have to sell the same number of “products” … or work the same number of hours, in order to achieve a certain profit.
And when it comes to hours, there’s a cap. Your potential to earn more is limited by the very fact that there will never, ever, be more than 24 hours in a day.
Another problem? What if your “costs” go up? You either need to put your prices up to compensate, or you’re suddenly earning LESS than you were before.
So, cost-based pricing makes sense as a starting point. You definitely need to ensure you’re covering your costs as a minimum … but ONLY covering your costs is never going to give you the financial freedom you’re looking for.
And think of this … do you, as a customer, care how much things cost a company to make? Or do you care about what you’re getting from that purchase?…
Do you have any idea how much it costs Apple to make an iPhone? Does it matter? Or do you buy it because of what that phone can do? Because of the SOLUTIONS it offers you?…
Thought so. You buy it, at whatever price they ask, because of the VALUE you perceive in the purchase.
The Problem with Competitor-Based Pricing
Competitor analysis is important. Every business needs to understand the environment in which they are operating … they need to know the level of competition, the type of competition, and they need to know where THEY want to position themselves relative to that competition.
When it comes to your pricing strategy, using your competitors as a benchmark for where to set your own rates makes sense. You know that there is a market for a particular product, or service, at that price. You know that it’s working.
But … it’s not YOUR strategy. And it’s not YOUR service.
And what’s more, by basing your strategy on your competitors’, you are by default NOT differentiating yourself. You’re just one more option for a customer … selling the same service, at the same prices.
If someone is looking at buying from you, it’s because they are interested in YOU … not the other similar options, and not even the more-famous, or better-known versions that already exist.
If you fancied a cola-type drink, and the only other options sounded much like the original at much the same price, would you choose one of them? Or would you just buy a Coca-Cola?…
I dare say it’d be the latter.
A competitor-based pricing strategy is safe. But it’s unlikely to make you stand out … it’s unlikely to push you to be different, and it’s unlikely to be the strategy that will lead to you earning what you’re really worth.
Why the Value-Based Pricing Strategy Is the Best Strategy
Value-based pricing – the strategy that allows businesses to be the best they can be!
This could also be called CUSTOMER-based pricing, because ultimately, it is exactly that….
It’s about basing your pricing strategy on what YOUR target customers are willing to pay for the VALUE that YOU bring to them.
Which, for the RIGHT solution to THEIR problem, will often be whatever you want them to pay.
The challenge? Working out exactly what the price they assign to your value is….
Which is where the following two points are important to remember:
Firstly – Most people have an expectation of what something should cost … and they usually won’t deviate too far from that figure.
Some people would never spend more than £100 on a pair of shoes; others will never pay less. Everyone has their own internal price–quality–value scale of expectation … and everyone’s scale is different.
Which means, there is a customer for every product and service … and for every price….
Secondly – if someone needs … or wants … something enough, the price doesn’t matter. Or at the very least … it’s not going to be the main consideration.
Broken down on the motorway? Do you want someone to get you and your car back on the road safely, and quickly? Or do you want to shop around for the cheapest option?
Looking for someone to help you take your business to the next level? What’s more important … their ideas, strategy, approach; their SOLUTION … or their price?
For the RIGHT solution, to the RIGHT client, in the RIGHT circumstance … VALUE is always more important than PRICE.
Focus on identifying the right customer, and then focus on their needs. Focus on the VALUE you can provide to THEM, and the focus on the price diminishes.
The Advantages of Value-based Pricing?
You get to know your customers better. Your whole pricing strategy is based on THEM. Not your competitor … and not yourself … you are led by the very people making the buying decisions.
It will help you understand what your customers truly want, or need. It will help you know what “features” to include, or develop. It will help you improve your service. And it will always be based on increasing the VALUE to THEM.
Your very strategy is centred on providing value to your customers. And that is a strategy that will keep them coming back for more.
And as you INCREASE the solutions, and the value that you can provide them … as you learn MORE about what they need, and how you can help them in MORE ways … you have the opportunity to earn MORE, because you’re adding more value to your offer.
You’re not limited by your time.
You’re not limited by your competitors.
You’re not limited, full stop.
When it comes to value, the sky really is the limit.