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Are your prices too low?

Having worked with many SMEs over the years we're convinced that the majority of these businesses are actually under pricing their services and products. So why are so many owner/managers setting prices too low and how do you review your pricing structure? We may have the answers.

Trevor Wilson from The FD Group, asks are your prices too low?

Businesses in general put a lot of time and resources into developing key processes such as business development, sales, marketing and distribution but as a general rule they skip over the area of pricing as though it has little impact on the bottom line.

In reality pricing can have a huge impact on your profitability as any increase often feeds straight through to the bottom line.

Why is it then that this area is not given the focus it deserves? Perhaps because pricing is not an exact science and raises real fears that if we get it wrong it could have a negative impact on the business.
Fallen into the under pricing trap?

Having worked with many SMEs over the years I am convinced that the majority of SME businesses are actually under pricing their services and products.

Whenever I take on a new client one of the first things I do is perform a business health check which looks at all areas of the business. More often than not I will recommend to management that they review their pricing with the objective of increasing prices.

This often creates consternation from the owner who more times than not throws his arms up in the air in horror and gives me 10 good reasons why this is impossible! In all my years supporting growing businesses I have yet to come across one owner who responds with reasons why he should increase his prices.

As already eluded to pricing is a very emotive area. The key is to take the emotion out of pricing and talk objectively to owners about their pricing strategy (if they have one) or agreeing to develop a pricing strategy which can work for their business.
Setting prices as the key approaches

The main approaches to setting prices can be summarised as: (1) Pricing by intuition or gut feeling. There is no science involved in this approach and there is a high degree of risk involved; (2) A cost plus or profit based approach - this requires some financial modelling to ensure costs are covered; (3) Competitor based pricing; and (4) a combination of the previous three.

However, during the pricing process businesses often lose sight of the intrinsic value in what they are selling. They forget why the customer has bought their product/service in the first place, which is, to solve a need or satisfy a want. Perceived benefit pricing - the answer?

Now I want to introduce you to another approach to pricing which I have found very useful over the years called 'perceived benefit' pricing. This requires you to look at the benefits your product/service bestows on a customer and price your product accordingly.
Case study

The best way to explain this is to take an example.

I recently met a programme developer who had developed a piece of software that had the potential to dramatically transform a business. He was unsure what he should price the product at.

Having first ascertained it had cost him £5,000 to develop, I asked him what he thought the product was worth. He told me he had low overheads and was initially planning to sell the product at £1,500 per unit.

I then asked him to put his customer's hat on. If he was offered a product that could transform his business, how much would he be prepared to pay? He scratched his head and his eyes lit up but before he could answer, I said "£15,000" Impossible was his reply, no one would pay that.

The £15,000 in this example is not important. What is important is that a customer is prepared to pay a price based on the perceived benefits. Once you have the benefits clearly delineated you then need self belief and confidence that your price is great value for money. Again pricing is not an exact science!

The professional approach to pricing.

Detailed below is a checklist to help owner managers approach pricing in a more professional way:

1. Review your prices at least twice a year. This does not necessarily mean you will increase prices as a consequence
2. Set aside time for this exercise
3. Look at financial modelling to determine the impact various pricing scenarios will have on the bottom line
4. Ensure you have identified the key objections customers may have to your prices and prepare answers to overcome those objections
5. Be prepared to lose some customers who are not prepared to pay the increased price
6. Be mindful that discounting the price of your product can have a significant impact on your profits
7. Ensure you set a minimum price level below which you will not go below e.g. especially if you are selling your time as a consultant
8. Take into account the perceived value of your services / products
9. Always look at the competition but don't necessarily price your services/products the same
10. Finally, ACT by implementing your recommendations, the rewards to your business could be considerable!

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