In this article, Barry Horwitz offers valuable insight into pricing.
Pricing. It’s one of the most important elements of any business value proposition. And yet, it’s a topic that many struggle with. That’s because setting the right price is about much more than simply setting price higher than costs or mimicking the actions of competitors.
Some things to consider…
Pricing sends signals.
While economists have long developed theories based on the assumption that we all act as rational beings (i.e., as customers, we do the math and figure out the optimal action), an entire field of behavioral economics has suggested otherwise.
For example, my tennis club has a simple, annual membership fee, avoiding the complexity of charging for court time by the hour. Like most exercise facilities, the frequent users are therefore subsidized by those who come less often. And, thanks to the “use it as much as you like” experience, the club feels more like home in comparison to those clubs that charge by the transaction.
Effort does not necessarily equal value.
In my own consulting work, I price based on the project, avoiding hourly charges or the old “time and materials” approach. After all, my clients are hiring me for an outcome — often a strategic plan — not simply time spent working on their project.
Project pricing removes “bad” incentives for me (e.g., working slowly, doing more research than necessary), while rewarding me for my existing knowledge. Most important, it provides simplicity and predictability for my clients while aligning price with value delivered.
Lower prices can reduce demand.
Some companies assume that when business is slower than anticipated, the best thing to do is lower prices… but that might not always be the case. One company in this position surveyed its customers, only to find that price was the third most important consideration, behind quality and the ability to make customized requests. Concluding that lowering price might suggest that those two factors would be reduced in the future, they raised their prices — and their business improved.
Likewise, a concern about charging too much can cause organizations to leave money on the table. As the pandemic was getting underway, a nonprofit client of mine had to quickly convert a convention to completely virtual. Their instinct was to lower the price, thinking that the value offered would not be perceived as being as high as their in-person offering. But when you consider that the real cost of attending an out-of-state conference can be many times higher than the virtual ticket alone, a discount may not have been necessary.
Key points include:
- Influencing customer behavior
- The potential for creativity
- How lower prices can reduce demand
Read the full article, The Price is (Sometimes) Right, on HorwitzandCo.com.