By Jennie Wong
The Charlotte Observer (MCT)
Are you priced correctly?
I once heard a story about a business professor asking her class what the proper price was to charge for a new headache pill. The students, all bright and eager, responded with a variety of textbook answers. They mentioned the cost of raw materials, labor, marketing and distribution. They talked about profit margins and future research and development. Finally, the professor waved her hand to quiet the class and said,
“The question you should be asking is, ’What is it worth to you to not have a headache?’ “
Whether you’re grappling with this issue because you’re about to launch a new business or because you have a sneaking suspicion that you need to tweak your pricing for an existing business, here are some helpful points to guide you to an answer that’s right for your business.
-Start with strategy.
Business strategy can be as complicated as you want to make it, but I still like to start with the influential work of Michael Treacy and Fred Wiersema. Their book “The Discipline of Market Leaders“ breaks down strategy into three categories: operational excellence, product leaders and customer intimacy.
In other words, are you more efficient than the competition, so you can charge less? Or are you more innovative than the competition, so you have something no one else can offer? Or are you taking customer service to a brand-new level?
Some people refer to this as your business’s “value proposition.“ I think of it as the reason your customers choose to work with you. If you’re not clear which category your business occupies, consider the pricing question a great opportunity to think more deeply on this issue, because your choice in this matter is foundational to the question of pricing.
-Service defines price.
You can probably deduce that different strategies lead different customers to your door.
Take the example of a massage therapy business. Some customers want a no-frills massage that they can afford more frequently. Other customers want the latest trend that they just read about in a magazine. Or maybe your customers want a really good, old-fashioned Swedish massage, but they want it with a complimentary cup of their favorite organic herbal tea while they slide into the slippers that are kept on site for their exclusive personal use.
Depending which of these customers you want as your core business, you’ll need a different price position relative to the range for your market.
Keep in mind that customers who want the latest trends or the highest level of service may actually want to pay more (although they’ll never say that), and will use price as signal that they are getting “the best money can buy.“ Everyone appreciates a good deal, but by failing to charge enough, you may lose out on trend-seeking or luxury-seeking customers.
-Don’t assume what clients can afford.
Instead of making an assumption on price point, consider asking prospective or existing clients for their assessment of the value of your product or service.
Whether you are surprised by their answer being higher or lower than the number you have in your head, it will be valuable data.
If you have an existing business, you may want to make pricing changes in conjunction with a fresh service offering, to avoid shocking current customers. And of course, you need to charge enough to stay in business. Calculate the cost of materials, labor and overhead to make sure that you are turning a profit. Business owners are usually highly attuned to their fixed and variable costs, and these considerations are very important in determining the perfect price.
Jennie Wong is an executive coach, author of the e-book “Ask the Mompreneur“ and the founder of the social shopping website CartCentric.com. Email her at TheJennieWonggmail.com.