In the world of coaching, we spend quite a bit of time discussing PRICE as it has a fundamental impact on profitability.
We are used to seeing ‘2 for 1’ offers, in fact Harvey Norman promises us MASSIVE DISCOUNTS almost daily. How do the words on this sign make you feel? What was the shop owner thinking when they wrote them? I, for one, am impressed, and I’m guessing these drinks are pretty good.
Let’s have a look at pricing theory.
“A very old puzzle in economics is the relation between price, value to the consumer, and cost of production. It is tempting to say that the price of a good is determined by its value to the user. Why, after all, would anyone buy a good for more or sell it for less? But if this is so, why are diamonds, which are relatively unimportant (most of us could get along quite well if they did not exist), worth so much more per pound than water, which is essential for life?
The answer is that price equals both cost of production and value to the user, both of which must therefore be equal to each other.” Price Theory: An Intermediate Text by David D. Fridman.
Our clients often wonder how to price their goods or services. I recommend consideration be given to several factors.
Cost of production. Calculate both the direct and indirect costs of production. Direct costs would be the materials or time directly associated with production – if prcing a steak meal in a restaurant, calculate the cost of the steak and accompaniments and the labour required to produce the meal. Indirect costs would include an appropriate contribution towards gas, electricity, rates, insurances and the myriad of other overhead expenses. Once these costs are known, add a profit margin to give you a selling price.
Competitor’s pricing. Go out to the market and see what your competitors are asking for a similar product or service. Take note of where you sit within the range – is your product at the higher end of the quality scale? If so, that’s where your price should also sit.
Preceived value. Think back to the diamonds. The price of a diamond is almost exclusively based on percieved value. What is your product or service worth to your customer? If your product is unique and has little or no competition, your asking price will be very much based on ‘what the market will bear’, in other words, how much a customer is willing to pay. Obviously, for your business model to be sustainable, your product must deliver or its value will quickly erode.
Test and measure. You will see these words a lot in business. The art of business lies in creativity. The science of business lies in the evaluation and refinement of your current practices. Fix a price. Test it in the market – you can do this by tracking your sales, obtaining feedback from your clients and surveying the market place. And then adjust your price based on the feedback your receive and test again…
The subject of pricing can be daunting for many business owners but careful and ongoing evaluation of your pricing policy can reap rich rewards.
Small Fish Business Coaching Canberra
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