‘The water was cold and shook me up. It was another few seconds before I realized that I accidentally drilled into a water pipe behind the plasterboard during one of my weekend DIY (don’t!) projects at home. With one hand covering the leak I frantically called a local plumber – who thankfully happened to be in the neighbourhood.
He was helpfully skilful and smoothly billed me £200 to seal the hole – a job that took him less than a minute.’
So why was I glad parting with my money and not fuming (I was, at myself, but not him)? What I needed was a skilled, well-equipped professional to be available immediately. The plumber was able to provide me with flawless service that roundly fit my requirements.
Despite all this, pricing for goods and services is rarely simple. One reason being service providers rarely take is a value-based approach to pricing. Not bandying hackneyed buzzwords but what you can charge as an individual or organisation often reflects the value or perception of value your customer places on the offering. Improving this perception is then a matter of digging deep to understand what the problem or need of your customer is and then figuring out a way to best solve that requirement.
So how should SMEs (or any other) businesses think about pricing? Here is a starter kit:
1. Can you determine what value your customer places on your offering?
One way to think about value is what it takes the customer to do the job on their own. Well-designed enterprise IT applications, for example, help reduce errors in human processing. They perform jobs faster reducing human and material cost. They could also enable companies increase their competitiveness. Each of these benefits can be potentially quantified to arrive at a cost or replacement value. This to be used in pricing technology applications. It is not easy to determine true or perceived value – but try and see the problem from your customer’s eyes and it might just become a little less hard
2. What do your competitors charge for something similar?
You can research your own market to see what your competitors offer and how similar they might be to your own offerings. Price comparison websites thrive on listing comparable offerings (think utility services or car insurance products). If you are a new web design company, a crowded market, research what your competitors charge for web design or hosting services, for e.g. How can you use your competitors prices to get to the true value that your customers place on website design services? Once again, look for what the customer’s actual problem is and how you can solve them better than your competitors.
3. What are your costs to deliver your services?
Let’s say your direct costs are X. These include things like your material costs or consultant costs. On top, you spend Y on marketing, sales and back office expenses. Your total costs are thus X+Y. You then add 10% to X+Y to come up with the price you will charge your customers. Called Cost-Plus pricing – this approach reflects what you want the customer to pay. It does not represent the value your customer places on your offering. There is no easy way of saying this – but frankly the customer doesn’t care what your costs are.
The hard to conceal fact is that pricing is a strategic weapon in your competitiveness arsenal. Get pricing right and not only will you maximise the financial strength of your business but will create very satisfied and grateful customers. If you don’t believe me ask my plumber who made an equivalent of £12,000 an hour.
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