In the first part, we learned that pricing our products or services also carries an information component to it. Because of that, you can’t price your offering to be perceived as “cheap” unless the experience is to be expected to compete by cost effectiveness. If you want to be perceived as high-quality your prices have to work for that perception, rather than against it.
I am sure that you have heard that some grocery stores ask manufacturers to package some of their products under the grocery store brand and then they sell it at a lower cost. Now, you may think that would mean that nobody would ever buy the original brand anymore. But that is far from the case.
The truth is that the original brand does sell greatly because some people associate the cheapest with the lowest quality and sometimes we don’t want the lowest quality. In fact, the grocery store is doing the brand a favor by creating a “bad quality” choice so that they are making the decision even easier. Soon, you will see grocery stores not only providing the low cost choice but also the high cost choice. However that is a topic for another day.
Imagine what would happen if people only bought the cheapest in every industry. Nobody would buy Mercedes Benz, Nike or Nautica. Nobody would eat at fancy restaurants. Nobody would buy Prada purses. And yes, people do.
So the important thing to understand is that next time that you are deciding how much you will charge for your offering, freelancer services or whatever you as a business, know that price carries information. Let’s say that again: “Price carries information.”
What do I want to communicate with my price
Depending on the strategy that you are going to adopt for your business, you may consider sending different messages. I recommend reading what Michael Porter has to say on this very subject. The competitive advantage, according to Porter, will consist of a successful strategy. One successful strategy can be “lowest cost” but another one can be “differentiation by attribute.”
In other words, if there is something that makes your offering different from your competitors and your clients find that valuable, they will be willing to pay a premium for your service or product. The fact that they are willing to pay a premium means there is a created expectation that now you have to fulfill. If you sell a true commodity, obviously a lowest cost strategy is very difficult to compete against. However adopting a differentiation strategy you may not only allow your true ideas to add value to your particular service, but also attract a higher price point that provides even more room for innovation.
So, a good first step in defining the proper pricing structure is to be clear about your strategy. Are you competing in your market place in a narrow or a broad way. Are you so large that you create economies of scale and therefore have a cost advantage over your competitors? Or are you focusing on being particularly good about a component that no other competitor can match? For example, can a small business compete against Walmart? Not if they want to compete on multi category. But if they focus in just one category, let’s say Beef Jerky, can they compete? absolutely. Why? Because there is no way that Walmart can carry every single bag of Beef Jerky in every single Walmart, that would take away their competitiveness in other areas. Therefore, Walmart could try to be the cheapest Beef Jerky in town, but you could be the only place that people go to when they want a wide selection.
Examining your Costs
In order to determine a good pricing strategy you have to identify very clearly your internal costs. How much does it really cost you to produce, distribute and market your product or service? Once you have determine that number, it should be used as a parameter of your competitiveness.
Please remember, everybody, even big corporations, has problems pricing correctly their services for maximum profit. Remember that as a business owner your main goal should be to maximize your revenue and not just to be “fair” in your own mind. I totally understand the desire to be fair in small business owners that are honest, the problem is that they end up being unfair to themselves.
If your business is to make shoes, and you are incredibly good at making shoes of all kinds you may not value it as much anymore. You are considered an expert and your shoes are simply some of the best there are. But in your mind, they could be not that big of a deal. Why? Because you make shoes in your sleep. You can make a pair of shoes without thinking. In other words, to you, it is not a big deal. But, what you don’t see any more is the amount of time, energy, dedication and know-how that took for you to get to that place. So when you are trying to be “fair” you often end up being “unfair” to yourself.
The best way to really be fair is to try your best to make a profit. Why? Because the market is brutally fair. As long as you are not deceiving the public by false advertising, or any other means, if you try to sell your products to maximize your profit, you will end up exactly with what you deserve. Many factors such as self esteem and confidence can actually make you review your views on fairness and therefore render your own estimations useless.
Let’s take a look at an example: let’s say that you sell apples in the market. And you have been selling apples for $5 a bag. And soon, another person set their cart right next to you and they are selling them for $4. If the quality of his apples is as good as yours, believe me, you’ll eventually have to charge less for your apples or change your strategy some other way. In other words, the market itself will find a way to be fair to you.
Do your homework in measuring your competitors and their offerings. Modify your product or service so that your value proposition is much stronger based on your target niche’s desires and finally define a price that reflects your strategy, your costs and how you fit in your competitive landscape.
I hope that this gives you a better idea on how to price your services in the future.
Here is one last tip: let people price themselves inside of your offering. Instead of selling only one bag of apples for $4.0, you could set three bag sizes and types of apples:
- Green Big Apples – Bag of 12: $9.99
- Golden Big Apples – Bag of 12: $7.99
- Regular Red Apples – Bag of 10: $4.99
Given these choices, probably your first inclination is to find what is more valuable to you. Comparing what you get for each one against each other and against your personal value scale. In other words, trying to find what is the right one for you. By having options you are allowed to price yourself according to your preferences and needs. Apple© does this extremely well. They have all sorts of iPhones, different colors, different cameras, different screen sizes and most importantly different prices. Why? Because by having those choices they allow the market to identify the value at which they want to take part… eventually giving their money to Apple, rather that to the competition.
For more information about how to effectively implement your internet business strategies make sure to contact Merkados today.
