How to give your customers value with great pricing

Pricing is the most important business decision you can make. Some businesses openly hope for success by offering low prices while others focus on image and branding and setting higher prices. Pricing is important because it represents your assessment of the value customers see in your product or service and how much your customers are willing to pay. Many businesses struggle with a strategy to set their prices. Set your prices too high and you scare away potential customers. Set your prices too low and you lose money on every sale and hurt your profitability. So what is the right way to establish your pricing strategy?

Strategy

Identify your key differentiating factor or unique value proposition (UVP). Your strategy should reinforce this unique value to keep your customers loyal and willing to pay more due to the unique benefits you offer. When determining your strategy, seek a long term advantage where you can defend your differentiation. If you don't, other businesses may enter the market and erode your edge, prices and profitability. Strategic Steps:

1. Review Your Competitive Strengths and Weaknesses

2. Identify the Unique Value of your points of difference

3. Educate your customers about the additional value you provide

4. Increase your prices!

Review Your Competitive Strengths and Weaknesses

Compare your business with your competitors by analysing your product to theirs and understand the value that you can add. Even if you've added more value, you may not be able to charge more for very long. Your competitors may copy your product. The stage of your industry also affects your pricing. In an emerging industry, where customers are forming new relationships, you need to be flexible to determine the right price and the best product and market combination. In a mature industry the relationships between your competitors and your potential customers are already set. If you are a new business entrant you will need to find the customer segment that will switch vendors and pay more for the added satisfaction you offer. Have a look at your competitors’ resources and potential response. If you're competing against giants, a frontal assault with lower prices may only cause failure. So consider entering by the side door and focusing on high income customers with higher prices. Differentiate yourself to gain an edge and you may be able to charge more.

Your Unique Value by Selling Points of Difference

It makes sense that you should set your prices as high as your market allows. Businesses frequently don't understand the unique value of their offer when deciding on the best price to charge. They don't compare it with their competitors’ offers. Focus on the unique value and benefits you offer and price your products and services accordingly. Your customers need to perceive the unique benefits of what you're selling. When the perceived benefit is higher, you can charge more. To price high, add value, then learn to sell value.

Identify your unique Selling Points of Difference and promote what aspects of your offer that are better. Products with more unique features and benefits can be priced higher. If the buyer perceives there is little difference between yours and your competitors’ products, they will regard it as a commodity, and consider only price in their buying decision. To understand your target segment and their willingness to pay, first identify the type of customer you're targeting.

Educating your customers about your value

Many businesses look at their costs to determine pricing. If customers value your product more than your competitors, they may pay more. Change the way you present your prices. Divert your customer focus from the price itself, and specify the value you're offering. Is your location a great place for your customer to hang out with like minded people? Is your brand perceived as cool enough that your customer wants to be seen in it? When it comes to safety, reliability, being healthy, a trend or status driver, paying a premium is considered to be a small price to pay. To be able to charge higher prices you have to know how to sell the value you're offering. Selling value is not easy but if you're able to do it your gross margins will be higher. Investors will evaluate your pricing and value by checking your gross margin (gross profit divided by sales). High value companies most often have high gross margins.

Your pricing should be a part of your overall strategy and goals. This means that if your business is high end, your prices should be at the high end and so should the rest of your operation. If, on the other hand, you want volume, then you need to know how to compete in the large segments of your industry. If you want to succeed in a niche market, know the market’s needs and price your products accordingly. The key is to be consistent throughout your business. For instance, don’t price low and have high overheads, or price high and have poor quality.

The Business Minder business consulting service operates throughout SE Asia with clients in Indonesia, Singapore and Malaysia.