When you make pricing decisions for your company’s products and services, you consider direct and indirect costs and trends, as well as your targeted profit margin. In other words, the first audience you start with are company stakeholders (e.g., needs of owners, investors, employees). The second audience are external – customers, prospects and influentials who make or influence buying decisions.
Most pricing decisions focus on economics. However, as Rafi Mohammed’s excellent book, The Art of Pricing: How to Find the Hidden Profits to Grow Your Business, shows there’s a lot more to it. Indeed, another key perspective is to think of it as a presentation, in which you have to master the key content issues and then present in a succinct, compelling way to your “customer”. As we’ve been recommending for years, when guiding you to build and deliver winning investor, management, marketing and board presentations, use the ADAP formula: be Audience-Driven and make Authentic Presentations.
Here are a few of the important considerations to consider:
- After you’ve determined the cost-plus price that is your “floor”, how much more can you charge to maximize your potential profit? To answer that question, you need to consider issues such as:
- What’s the general market demand/supply today and in the near future?
- What’s the price-value that customers get from your product vs. substitutes
- How much extra are prospects and customers willing to pay for the strengths (e.g., quality, ease of use, customer support, etc.) minus the weaknesses (e.g., sizing options, convenience, etc.
- How does your equation compare to other options available to customers and prospects?
- What impact does pricing your item at a certain “break-point” (e.g., even number ($10) versus ending the price with a 99 (e.g., $9.99)? (Hint: It depends on the type of product and sensitivity of customers to the “apparently” lower price used in the 99 scenario.)
- What pricing signals are communicated through the packaging of your product (e.g., Tiffany’s blue box, and nature of the marketplace (e.g., low, medium or high-end store).)
- How impact does bundling and unbundling your product/service have on the ability to raise/lower prices and increase/decrease demand?
As with any presentation, you need to do the homework first: understand the core issues related to the market and costs. Then, consider and test the presentation options, including packaging and sales settings. Finally, consider the viewpoints not just of the target buyer but also those of partners, colleagues and influences involved with the decision-making.
One last point, which is especially valuable at this inflationary time. Not all changes have the same impact. For instance, a McKinsey study found that increasing a price by 1% translates into an 11% increase in profits. In contrast, increasing volume by the same amount resulted in only a 3.3% increase. Cutting variable costs by 1% resulted in a 7.8% increase and cutting fixed costs – only a 2.3% increase.
You work hard for your money, now is the time to unleash the hidden profits by making better price-presentation-decisions.