When it comes to setting prices, I see SMEs make the same mistakes. So, let’s learn from those pricing mistakes and ensure your company’s prices are set correctly.
Mistake 1: Not calculating the true costs of creating and delivering your product or service
The two main pricing strategies are cost-based pricing and value-based pricing.
- Cost-based pricing is where you add a profit margin on top of your break-even price.
- Value-based pricing is when you calculate how much your product or service is worth to the customer, and charge based on that.
Whichever strategy you choose, you need to know how much it costs you to produce and deliver your services / products. This is often difficult because different services and products have different costs.
If it is too much to calculate a true figure, then aim for a rough break-even figure; it’s better than a total guess.
Things to include in your calculation are:
- Your products’ / services manufacturing costs and material: if you offer a service, include physical evidence such as provide worksheets, training manuals, reports.
- Running costs for physical assets: phones, phone lines, desk space, pcs, laptops etc.
- Labour costs to make your product or deliver your service: how long does it take to make one product? To deliver one of your services? If you are delivering a service, be sure to include preparation and research time if you offer an “advice” based service
- Delivery costs: how much does it cost to get your service or products to clients? Postage? Travel costs? Travel time can also be calculated as a cost – if it takes one team member an hour to drive to one client, that’s one hour of their wage to be added to the costs.
- Marketing and Sales costs: how much does it cost in time and marketing spend to sell “one” product or service? Have you included marketing projects such as updating websites, reprinting brochures or business cards? What is your annual marketing spend for your brand awareness? What is it on each product and service?
Your business has to be pay for all of these and bring in enough money to cover these costs.
Tip: You might find it easier to come up with one large figure at first for all your estimated costs and overheads, and then have that in mind when doing your pricing.
Mistake 2. Not taking relevant experience and reputation in to account
I typically see this in professional service providers but other business types are guilty of it too. Either, their prices are too low or too high and a key reason for the mistake is because they aren’t considering reputation and / or experience. Let me give you two real examples to best illustrate my point.
Example 1. Lack of experience and reputation
John set up a Business Financial Consultancy, offering specialist advice to SMEs. He knew his competitors were charging £95 per hour. He had also recently left a fulltime job where he was paid £95 per hour so he knew that was his value. Therefore, he set his prices at £95 per hour.
He struggled to find clients. Why?
A key reason was he did not have the same experience as his competitors and as a new comer to the SME market, he had zero reputation in it. He had little experience in the SME market. Savvy business owners picked up on that very quickly. They could see he was skilled but he didn’t come across as “getting” them. Those that probed deeper realised most of John’s work had been with large corporates; his competitors were worth the £95 per hour because of their relevant experience, but John wasn’t. Yet.
What did we do to address this?
First, John lowered his prices. He set them at £75 per hour and attracted more interest. With each new client, he increased his prices as his relevant experience increased.
Within one year, he had a portfolio of 7 relevant case-studies and a price of £95 per hour that Directors of SMEs felt was now worth paying.
Example 2. Not valuing their reputation
Meena ran a successful Graphic Design agency. They had a great reputation and a full client book. However, the business struggled each month to make a profit. As business boomed, costs increased but prices didn’t. Meena felt that she couldn’t increase them as, the team was doing the same work they had been doing for years – so how could she justify charging more?
How did we solve this?
First, I helped Meena realise it was experience that made her agency’s work so valuable – her team knew how to quickly assess what each client needed, come up with suitable ideas, and then deliver on time and to budget. Meena agreed prices should be raised but what about loyal clients?
Next, we devised a strategy to increase her prices without alienating loyal clients.
We developed a 1 year pricing plan. By the end of it, all prices would have increased by 10%.
The new prices came into effect immediately for any new client (someone who hadn’t engaged her services in at least 12 months was considered new). This was accompanied by a huge marketing push to provide proof of the value and worth of the service Meena’s agency provided, emphasising their relevant experience.
All existing clients were sent a letter about the new prices. They were told that, because of their loyalty, they would only see a small increase in price (equivalent to around 4%) effective immediately. One year later, they were informed of a similar price increase, which put them on the same pricing level as all other clients.
When she finally brought her remaining legacy clients in line with the rest of her clients’ pricing, Meena’s agency had such a strong reputation, none of them questioned the price increase; they knew they were getting excellent value.
Reputation and experience in your targeted market place affects any pricing decision , so do take them into account.
Mistake 3. Forgetting the relationship between price and brand positioning
Price is a key part of how prospective clients and the market place perceive value and make judgements about products and services.
- If you wish to be seen as a premium offering, then price your products and services accordingly.
- If you wish to be a budget, low-cost, option, price for that.
- If you want to occupy solid “middle of the road” market positioning, then price for that.
Of course, your price position has to match all other aspects of your marketing (product, promotional material, customer service etc.) but too often price is treated purely as a financial concern, not a marketing one.
It must also “fit” in with your competitors; if you wish to be a premium priced organisation then you need to ensure you are priced at the top of your market, and so on for other price options. If you fail to have that basic understanding, then your “premium” price could either be too low or far too high. Competitor research is a must here.
Read my blog Five Conversations to unlock your growth. Conversation #4. Market positioning – what do your prices say? for more detail.
Any business has to set its prices to make a profit but price is more than costs + profit. To set your prices you have to understand your business’s true costs; to appreciate the true value you offer, often based on experience and quality; and to remember that your price carries a marketing message to people about what type of product or service they are going to get.
If you’d like help to determine and set your prices, then do contact me and let’s start a conversation.
Kara Stanford, award-winning Strategic Marketing Consultant, KMS Marketing
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