The reason most business owners spend less than one day a year working on their pricing policy is the fact that they don’t have a process to tackle that problem. Here is my 7 Step Process on how to improve your profitability through better pricing:
Formulate a price discrimination strategy. Every customer has a different willingness to pay. You need to spend some time working out how to charge different prices to different customers. Think that’s impossible? The airlines managed to do it.
Figure out your value proposition. This is a great whiteboard exercise. List out every tangible and intangible value that you can think of for your product or service. Talk to your customer’s and ask them about what it is they like about your products or service.
Communicate your value effectively. Review all your promotional materials and update them to include as much of your product values. The most powerful are usually the intangible values that move a customer to buy. Segmenting your customers into various classes and aiming value statements that are specific to them is a great approach at value presentation.
Make sure your getting paid. There is nothing wrong with spreading the price over the period that the service will be delivered but avoid situations where the customer receives all the value without paying. Remember, the key here is to “make it easy for the customer to pay.”
Formulate your price. There are hundreds of different ways to formulate your price, but they all boil down to two major categories: cost-plus and value pricing. When ever possible, use value pricing.
Make the price seem small. There are numerous studies about how human beings perceive price and make buying decisions. The biggest one in my mind is “anchoring’. The first number presented tends to anchor how the brain will look at the next number presented. If I say, “McDonalds produced 12 billion hamburgers last month and by the way my fee is $10,000”, vs. “a happy meal costs $5.00 and by the way my fee is $10,000. In the first case my fee feels considerably smaller than in the second case. This is just one of the many things that you can do to make your price seem smaller or bigger.
Add a powerful guarantee. This goes back to making it easy for the customer to buy. The more risk you can take away from the customer, the easier a time they have in signing up with you.
Moving your prices up, even just a point or two, is the single biggest thing you can do to improving your profitability. While pricing changes can seem scary, it’s a far easier approach to higher profits than cost cutting.