Riddell: Don’t sell yourself short
June 13, 2017
Price setting is both a common question and a challenge that business owners and managers have to confront and master. While every business and industry has its own set of pricing criteria and constraints, some broad generalities can be addressed along with some suggestions for setting.
First off, everyone needs to consciously be aware of the simple fact that the pricing component of the marketing mix is the sole source of revenue. Because of this very simple fact, every entrepreneurial manager or owner needs to be vigilant in always striving to maximize the price volume relationship. That is, at what price combined with what volume can I maximize my gross profit. Marketing consultants like to refer to this magic as price/volume sensitivity studies and thoughtful application of this relationship can result in significant improvement in financial performance. Significant improvement in financial performance is akin to survival of the business.
Suffice it to say that the vast majority of start up companies under price their offerings. Many times, this is driven by a very realistic fear of not making sales and thus not generating cash to cover their obligations. More often, however, it is a matter of simply not understanding the customer's definition of value in terms of price and features and pro-acting accordingly. Cash, and sometimes a lot of it, is simply left on the table and future sales opportunities run the risk of being negatively impacted by this same undervaluing. You inadvertently build a cheap price expectation into future customer purchases. I learned very early on that if you are going to make a mistake in pricing, especially in a startup mode, err on the high side. You can always adjust down with inherent flexibility. It can be very difficult to adjust up.
Given the "art" aspect of pricing, some tools used by professionals for price setting may seem rather unscientific, but they are effective. An easy tool to utilize is to ask yourself if you were going to purchase this product or service, how much would it be worth to you based on a comparable substitution. Whatever number you come up with, increase it by 50 percent and see what the reaction is for potential customers. Another method involves a bit of a game and is used for product line adjustments. Take five or six associates, have each one throw a dollar in the pot. The question is then asked "What should this product sell for?" Suggestions are written on a piece of paper and all are averaged. The person closest to the average wins the pot. There is one caveat that really makes this exercise interesting—the highest and the lowest are counted in the average but disqualified from a chance for winning. You may be shocked and amazed at what this process will reveal.
Setting price is not just an intellectual exercise. There is a distinct and direct connection between your financial security and that of your family with maximizing profitability through price/volume awareness. Once you make this connection, you emotionally begin to understand the importance of pricing and the real cost of being too cheap.