What is a pricing process?
There is a very old joke about a tourist getting lost. He looks around and spots a farmer leaning on the gate to his farm, watching him. He goes over and asks the farmer how to get to his destination. The farmer pauses, takes the straw that he’s been chewing from his mouth, and says ‘well, if I was you I wouldn’t start from here’.
Ok, it’s not going to win any prizes for the joke of the century (it’s the way I told it). But this is how many companies approach pricing - they start in the wrong place, so unsurprisingly they don’t end up where they want to be, which is having the best possible price.
When most businesses decide on a price for a product or service, how do they normally go about it?
A typical approach sounds very reasonable: research the price that everyone else in your market is charging for their product or service, then pitch your price close to theirs. If you think you’ve got a superior product or service, then perhaps you might charge a small premium compared to your competitors; if you think you’ve got a cost advantage then perhaps you might charge a little less to gain market share; or perhaps you take the easy road and just match the market average.
Another approach is to use a ‘cost plus’ method. You add up all your costs, decide how much margin you want to make, and add that to the cost to get a price.
The problem is that this is starting in the wrong place.
A full pricing process should look more like this:
Review your basic pricing philosophy, which can be different for different products/services, different channels, or different markets/segments.
Analyse where you really make the most net margin; assess what creates value in the eyes of your customers, and how that value compares with good/better/best alternatives or what the competition offers; and understand the buying process that your customer is going through.
Review which fundamental pricing strategy is most appropriate, decide on the price you want to charge.
Consider different tactical approaches to pricing, and how they might influence the price you have chosen.
Decide how best to communicate your price.
This is a big topic, books have been written on it (including mine!). It’s too much for a single blog post, but the good news is that I will address every element of this one blog at a time. Stay tuned for the next instalment.
Photo by Bec Ritchie on Unsplash