Don’t Ignore Price Strategies –3 Methods & 3 Impactful Ideas for Boosting Profits

August 27, 2014 By Dave Chase

At least once a year, we all stress about pricing, and some of us more frequently.  Pricing decisions can have far-reaching and impactful ramifications to your business.  However, pricing decisions should never be a singular decision made once a year and then ignored for 12 months.

Pricing is about the outcome…AND the journey.  Running a pricing process, if done attentively, will teach an entrepreneur a lot about both their products and their consumers.

I’ve identified below what are considered the 3 primary pricing methods and a handful of strategies to consider in your business.

Pricing Methods

Cost Plus

The primary pro of this method is its ease.  Determining your cost and adding a fixed value or percentage is relatively simple.  It is quick and requires very few resources.   It is common in manufactured or commodity products.  However, it gives no consideration to whether a customer feels it is overpriced or, alternatively, whether they would have paid even more.

Competitive

Talk about ease…this is the simplest.  You can choose to simply rely on others having done the work and just copying them.  The easier a product is to comparison shop, the more likely a business will feel an obligation to competitively price their products.  Retailers, for example, are frequently locked into this method, as people like me see a product on the shelf and then immediately pull up Amazon.com and see if I can find it cheaper.

Value Pricing

This method assumes that you don’t have to be lowest price to be the best.  It seeks to match price with the willingness of a customer to pay and asks what they feel the product is worth.  I bought a sandwich the other day whose quality far exceeded other sandwiches I’ve had locally, but the price was the same.  I would happily have paid $2-3 more than I did.  Value was left on the table, pun intended.  This method requires the most work as it can vary by region or customer type.  The value pricing method will usually yield the greatest benefits in terms of profit and also customer oriented products.

price strategy

Strategies that work

Just do it.  We’ve observed that sometimes businesses are unnecessarily afraid to change pricing, believing the backlash will be much stronger than it usually is.  One strategy is to just put on your batting gloves and take a swing.  Remember, especially with software as a service companies, communicating a forthcoming price increase is a great way to motivate your pipeline to make a decision.  Here is an intelligent guide to Saas pricing.

Alternatives pricing.  For services companies (tech, professional, or otherwise) this is a highly effective method of pricing that seeks to bracket your primary offer.  Give your customers the alternatives of a low end offering (base package that is limited), a target offering (the ideal package most likely to be selected) and a deluxe package.  Most customers when presented with a choice like this will opt for the target offer.  This strategy assists you in defining for your customer what they will, and more importantly, will not get, for the price.  And occasionally, you’ll get a bite on the deluxe package that you would never have presented otherwise because it seemed too high.

Split testing.  Where possible, a split test, is a terrific way to test your pricing changes without taking the risk of impacting your full market.  Find a location or customer segment you can test out your pricing changes and then observe the behavior without risking alienating all your customers.

price is right

David Chase, Managing Partner at Advanced CFO Solutions, has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With 15 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.

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