You are barely 3 minutes into an interior design pitch for this client, the biggest pitch you have ever made. Then an interjection.
Then suddenly your whole pitch is in shambles, you don’t what to say anymore. How much should I quote? Is it too little ? Will I lose the job if I ask for too much? And you tailspin.
Everybody faces these questions and buyers like to get to that point even before you know their scale of business or budget. . Creative entrepreneurs have a really hard time getting the right price for their products. On the other hand, pricing is the basis of all enterprise. It has to be just right. Higher than optimum and the sales will suffer, lower and you will be struggling to show where the money went.
Let us first address the first challenge you will encounter when it comes to pricing. Are you selling a product or service ?
Pricing for a tangible product is a fairly easy because the customer can touch and feel what they are buying thus can place a value to the product. If there’s differentiation or value addition, then get the client to see/feel that is not too difficult.
On the other hand, pricing a service is not so easy or direct.. Services are intangible and customers understanding of the price will differ. They cannot see what they are paying for and in most cases they may judge the price on the sellers attitude, personality or appearance.
What should you consider when it comes to pricing your goods or services?
- Financial Performance – The basic measure of any business performance is in the profits. Before setting your prices, decide. Is profit the motive? How much margin are you looking at? Remember a good price must include a healthy profit margin. Business growth is driven by profits, so do not compromise on this as it will affect long term profit margins.
- Target Market – You must fully understand the behaviour, traits and income of the people you are selling. Is it to a price sensitive market or a group with enough disposable income? If you are selling lessons to golfers, the pricing strategy will be different from a person selling solar backup lights for the low end of the market.
- Do not charge for time – A lot of creatives charge for their services on a per hour basis. The client doesn’t pay for the value, experience, skill you add to the job. Just the time. With this approach, you will hit the ceiling and actually earn less. As you get more experience, you become faster in your work – which somehow works against you.
- Undercutting will hurt you – Lot’s of people, especially the newbies, get into the market and undercut everyone. This puts the focus fully on the price instead of skill, performance or creativity. It may generate business but las soon as you raise prices, they leave for the next lowest price.
You will never know the right pricing model without research and testing. There are many pricing models out there and only one will be suitable for you. Let us examine the pricing models you might need to implement.
Razor blade model – Sell the basic reusable unit for cheap and the consumable unit for a premium. This is how printer manufacturers make money. On the ink refills that will be worth many times the cost of purchasing the printer
Feature pricing – Sell barebones product and then have price increments for additional features. For example new cars have a price for the standard unit. If you want leather seats, bluetooth, climate control, sunroof etc the price goes up for every feature you add.
Competitive positioning – Benchmark the price with the others. The more the competitors the worse it gets.
Tiered or volume pricing – Price the product by volume usage. For example, internet bundles get cheaper per unit the more you buy.
Freemium pricing – Give the basic service for free, but additional services are available for an additional fee. This requires massive client numbers, deep pockets and patience. Just like LinkedIn.
Cost-based model – This is the most common pricing model where the price is set at 10% -300% above the cost. When the margin is high when there’s little competition and reduces as competition increases.
Value model – Here, the price charged is commensurate with the value given to a customer. Everybody is happy to pay for value and it results in a fairer price for the entrepreneur. This is the best pricing model for you and the clients, just make sure the advantages are well captured and value easy to grasp.
If you have been scratching you head about pricing, you are not alone. Companies hire consultants to help develop optimum pricing models for their products and services. The important thing is to understand what your market values most and start working from there. Through some research, experimentation and balancing, you should arrive at the right price.