9 Keys to Unlock the Pricing Puzzle

by Shaun R Smith on April 27, 2010

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In last week’s article – we discussed two largely objective criteria that must be used when pricing your product or service:

1. Competitive positioning

2. Cost plus

This week, we will discuss a much more subjective element to the pricing puzzle – the value added by your product or service.  Some of the areas that this covers include the following:

1. Return on investment

2. Equivalent product costing

3. Brand/emotional relationship

4. Scarcity

5. Price signaling

6. Financing/cash flow of consumer base

7. Cultural issues

8. Economic conditions

9. International variables

Let’s explore each of these in more detail to see how it will influence your company’s pricing.

Return on Investment

If you are selling to a business, there are only three reasons that business purchasers would be buying your product or service:

1. Make more money

2. Save money

3. Make the same amount with less input (time, resources, aggravation)

Are you a social media marketing agency that will produce quantifiable financial results for your client?  That is the return on the investment in your services.  What return are you targeting your clients to receive from using your company?

Retail consumers also can purchase goods and services where they would get a return on their investment – and where that would be a motivating factor for them.  An obvious example is an investment advisor.  If I pay a 2% advisory fee on my funds, I expect to perform better than the market net of fees, or at least better than I would have performed on my own.

Equivalent Product Costing

How much are people who want your product or service or the experience that your goods provide paying for it elsewhere.  This is similar to the competitive analysis we talked about earlier.  However instead of a chart of competitors and prices, we are trying to get a sense of the value the market places on satisfying this want.  By looking at what differences there are between your products and others, you can get a sense of the relative value to the market.

Branding and the Emotional Connection

Why do people pay $249 for a certain sneaker that does the same function as a $29 sneaker?  People buy almost completely on emotions and filling their wants (not their needs).  They buy the story of a brand.  What story does your brand tell?  What’s that worth in the market?

And how do people feel about your company and brand?  Many women have strong feelings about the little blue box – which is why Tiffany & Co. is able to charge the mark-ups that they charge when Diamond Row is around the corner where you can get better diamonds for a fraction of the price.  Tiffany is selling a diamond, but mostly their selling a brand experience and your emotional relationship to a blue box.

Scarcity

Is there a limited supply of your goods?  More importantly, is there the perception of a limited supply of your goods.  People value what they can’t have, and they value exclusivity.  A signed, limited edition print is going to have significantly higher value than a print produced without those assurances.  In some cases, the production run of the signed and numbered versions might even be larger – but as a consumer, we value the appearance and assurance of scarcity.

Is your product or service scarce in a way that matters to your market?  Would scarcity add value to your offering, increasing your pricing power?  Or are you playing your business game in a mass market where the goal is to get as large a distribution as possible?

Price Signaling

In certain businesses, price actually affects perceived value.  A Luis Vitton bag doesn’t work any more effectively than any other bag, but the price says something about you and about the bag.  The price becomes part of the story and part of the value.

Financing/cash flow of Your Consumer Base

In many markets, access to capital will affect your price and also the ability for transactions to even occur.  The housing market is a prime example of this – since housing is a purchase that people make more on the monthly cost of carry than on the direct price itself.  If you are selling commercial furniture, if the credit markets are tightening up and banks are calling in commercial loans and lines of credit, you are going to have a difficult time moving your product.

I had a friend who owned a number of private children’s learning centers.  His business skyrocketed when he partnered with a financing company.  He went from selling a $1495-course to improve your child’s reading to securing your child’s future for only $85 per month.

Cultural Issues

There are certain goods and services that are more valuable in certain cultures.  Another cultural effect might be a closed purchasing network.  I worked with a business that made custom wigs, and they became known in the circle of New York Hasidic woman as having the best looking and best quality wigs in the market.  Their prices increased once they broke into that niche.

In London, apartments are rented and rental rates are all quoted by the week, whereas in the United States, rentals are mostly monthly.

Economic conditions

As we’ve seen during the “Great Recession,” the state of the economy can have a profound impact on pricing power.  Many of the issues that occur in an economic downturn are related to supply and demand.  In the case of this recession, because of the panic that ensued, the issues went beyond that to an actual paralysis in the market – combined with a major freeze on credit.  Are you remarkable enough to maintain your pricing in such times?  Many markets themselves have shrunk during this recession – the housing market and all the auxiliary services to that market, for example.  If your market is smaller currently, how are you going to adjust to make it through?  Or are there fundamental changes that have occurred in your market such that it’s not ever going to be the way it was, and you have some major business decisions to make?

International Variables

If you have a product or service that is global, that is sourced globally, or that has competition from imports, the condition of the socio-political landscape and exchange rates can have a major impact on your business.  One client saw their costs rise by 20% in one year due to a weakening dollar.  Is there a way you can protect yourself against these circumstances?  How does this affect your market and what pricing opportunities or challenges does this create.

The Price is Right

Weighing the hard analysis we talked about last week with the more subjective elements we discussed this week will lead you to a price in which you will have confidence.  You will know where you stand in the market and how your pricing is in alignment with your brand and your company’s goals.

Photo by:  http://www.flickr.com/photos/myklroventine/ / CC BY 2.0

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