Pricing: The Magic Number
Lisa Pierce sets her company’s prices using a technique best described as advanced back-of-the-envelope.
The founder of Alpha & Omega Delivery, a courier service in Springfield, Ill., simply adds up her costs and estimates how much she needs to charge to cover that amount. But her $500,000 company has seen the edge of bankruptcy in five of its eight years, and Pierce’s pricing strategy—or lack thereof—isn’t helping.
Any of this sound familiar? The “charge based on what the other guys are charging and hope to squeeze out a profit” method of pricing, otherwise known as “cost and competition,” is used by plenty of companies, both large and small.
It’s intuitive and can be relatively easy to work out. But it often leaves a lot of money on the table. Because the cost-and-competition method has little to do with how your customers value your products or services. For all you know, your pricing may be steering people away from your company.
Developing a pricing strategy begins with determining the true value of your offerings to customers. If you doubt that different people place different values on the exact same product or service, just go to an auction, where a single item can bring wildly varying bids.
People pay for what they value, and that translates into a willingness to pay a premium for higher-quality, greater expertise, or faster service. There is often a gap between what customers will pay and what a business charges.
Ideally, reconsidering your pricing will force you to think more about your customers’ needs and wants. And that’s priceless.
Photo by homepages.ius.edu.
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