- For a Better Pricing Strategy, Think Like Goldilocks - May 6, 2022
Being more profitable is the result of a successful campaign to cut costs and to pump up sales. But the real profit comes about through a pricing strategy that works.
The most popular pricing strategy for startups and small businesses is to follow the lemmings and charge what everyone else charges or to calculate the costs and target a certain margin. Both are disasters. Following the pack leads to average profits at best. Marking up from costs leaves money on the table.
Following the pack leads to average profits at best.
So, is there a better way?
First, you must have a value proposition that works. This value proposition must sell your story in very few words and answer the question: “Why should I buy from you?”
I was on the senior management team of a leading fabrication company in Canada. We had a meeting with an enormous company for whom we wanted a lot of work. The first question from their side of the table was: “Why should we buy from you?” That was a real gut punch.
The company owner replied, ”Because we will deliver the right product to you on time.” The buyers just rolled their eyes and looked bored. Why? Because every fabrication company in town said the same thing but failed to deliver the product as ordered (wrong color, bent left instead of right, wrong size holes) and always, always late.
The owner, watching this happen, responded with: “Let me explain. We know that we will deliver the product as ordered 97.3% of the time and to your loading bay plus or minus 1 day of the order date.”
This blew them away. It made us stand head and shoulders above the crowd simply because we made an effort to quantify our competitive edge. We got the contracts.
Once you have a value proposition, wee can proceed to converting that to value pricing. Build a list of all the value you can put on the table. Each item in this list should be apparently valuable to the customer but often will cost you money. Even offering a longer warranty costs you money! When you get to 25 measurable customer benefits, stop. This is your dream list and should have a Dream Price that will earn all the money you dreamed of when you started your business.
What is the dream price? When you started out in business, you calculated how much you needed to break even (the Floor Price) and how much you hoped (dreamed) to take home from your efforts. These numbers form the basis for the Dream Price. Please note that the price will fluctuate over time, both up and down, as market conditions change, but that in deploying this technique you will be constantly refreshed by your customers and be able to stay current.
Step 2: Start cutting features and benefits from your list of 25. Concentrate on items that cost you money, until you have 15 left. Then remove those costs from the list of 25 and recalculate your price. This is your Everyday Price. You still have profit on these jobs. And ideally, since we as people tend to choose in the middle, this price point should have the highest margin.
Finally, cut that list again to only 15 benefits and subtract those costs to arrive at your Econo Price. This price still makes you money and will enable you to get contracts from customers with thin wallets. You are still profitable because you cut out items that cost you money but the customer gets less value.
Why 3 and not 103? Because the well-documented Goldilocks effect tells us that having more than three choices leads to paralysis in decision-making. A single price (the usual way we offer our price) is a take it or leave it proposal. There are only two outcomes possible – Yes or NO. There is little discussion. Two choices is too close to the stark take it or leave it price. But at three choices, the bed is not too hard, not too soft, but exactly right. At four choices, the customer gets brain freeze and has to consult with a partner or superior.
I once owned a renovation company. I had just taken an estimating course in Chicago and returned, freshly minted, to estimate a bathroom renovation. Measurements taken and costs penciled in, I presented a price of $5,000 to the customers at their kitchen table.
When they sat there glumly, I suggested that maybe they were not comfortable with the price. They agreed, telling me that they had hoped to pay $4,000 for the job.
“No problem,” I responded. “I will replace the expensive pedestal sink with a more modest basin and reduce the quality (and cost) of a couple of other items.” The new total was $4,000 and I left their home with a contract signed and deposit in hand. I did not have to discount. It would have been simpler to give a discount, but that $1,000 would have come from my pocket.
Why does this approach work?
First you are building a connection to the customer by letting them choose the price that suits their wallet. Not everyone has a fat wallet.
Second, you get the backstory on your client that you will struggle to get elsewhere. All the sales books tell you to get to know your customer. That is almost impossible now since attention spans are shrinking.
But the most important part of this way of pricing is that you get instant, measurable feedback on what matters to the potential customer, including whether they will pay for it. So, if the type of paint you offer is not important, it comes off your list of benefits. If everyone is focusing on ceramic tile floors, then tiling gets added.
Does it work? In multiple consulting projects, this process compelled the seller to focus attention on what value is being offered to the customers. With this design, each of the price points is profitable.
… And no one ever had to discount to get a sale.