One key aspect of running a successful business is determining the right pricing strategy to ensure profitability while also delivering value to your customers. Many entrepreneurs struggle with setting prices, often resorting to guesswork. The lack of comprehensive guidance in the form of practical resources can further complicate this crucial decision-making process.
Entrepreneurs often assume that a slight price increase of 5-10 percent may deter customers, especially for lower-priced items. However, this belief doesn’t always hold true. Consider Giffen goods, a concept named after the Scottish economist Sir Robert Giffen, where the demand for a product actually rises as its price increases. This phenomenon contradicts the typical behaviour observed with most products.
Giffen goods represent a unique category where consumers exhibit an increased interest in purchasing despite the higher price tag. This trend is driven by the exceptional quality or distinctive appeal of these products. A prime example is Louis Vuitton‘s premium leather goods collection, coupled with the allure of personalised monogramming options, creating a sense of exclusivity and desirability among consumers.
There are however, many different strategies for this, the most popular being
- Cost+ pricing.. where what it costs to make your product, including overheads, is added to your preferred profit margin to determine what you sell it for. This strategy can be short-sighted.
- Competitive pricing.. benchmarking against rivals
- Price skimming… involves launching with a high price to create a premium feel, then gradually lowering it over time.
- Penetration pricing… where you grab as much of the market as you can by starting low, and then raising prices.
- Aim high with a better product but go lower if you want to scale rapidly
- Perceived value… if your brand or product has added benefits, so Netflix, for instance, has two standard plans, one of which is ad-free, and a premium package, which allows for more devices to access and download that ad-free content.
- Algorithmic approach… perfected by the likes of Uber. an algorithm works out the price based on the volume of ride requests, relative to the drivers available, and the customer’s location.
- Understand what customers are willing to pay and what extra features would be required for them to pay even more.. probably a far better model
Entrepreneurs often hesitate to divulge their pricing strategy, fearing revealing too much to competitors and due to the perception that their approach is disorganised. However, pricing should not be seen as random; it is a refined skill and an art that requires the same level of meticulousness as any other aspect of a business. Effective pricing has the potential to revolutionise growth. Even a slight 1% or 2% rise in average prices can have a profound impact, especially when operating on narrow profit margins.
Assessing prices across your product range is crucial. Determine which products can support higher pricing by gathering insights from both internal and external sources. Travel across the country to gather feedback from diverse backgrounds. Testing prices is key, and be open to adjusting based on feedback. Implement an omni-channel strategy to ensure consistency in pricing. Avoid heavy discounting as it can impact brand perception negatively.
Questions to ask…
- Is profitability more important than exclusivity?
- Are you trying to build reputation over a short or long term?
- What is it that you’re trying to beat competitors on?
- Can you build an attractive subscription model for a more predictable income?
In the competitive business landscape, undervaluing products and services can be a common pitfall. By strategically pricing your offerings, you have the opportunity to enhance quality, stand out from competitors, and boost profitability. Consider reevaluating your pricing strategy to unlock greater potential for your business.
Too many businesses under-price and under-sell, another of those reserved British traits that separates us from the Americans. Put the price up a bit and you can improve the quality of your product, differentiate it from the competition and become a more profitable company with more money to reinvest in the business.
and finally…
