More important, like David in his battle against Goliath, are you choosing a slingshot or a club? Too often, small- to mid-sized businesses choose a club instead of a slingshot.
A machine shop and an advertising agency feel pressure to match the hourly rates of their largest adversaries. Invariably, this is a mistake because the smaller firms' costs of production and service differ from those of larger competitors. When customers and prospects choose smaller companies over larger firms, it is almost always for nonprice factors.
There are countless examples of missed profit opportunities, lost margin dollars and unnecessary pricing concessions. Invariably, owners of smaller companies leave money on the table for three reasons:
- They don't focus on their best and highest use. (See last month's column for more on this.)
- They have too little confidence in the value they provide. Smaller firms don't always respect their own products and services enough to ask customers to pay for them.
- They don't understand their own marketplace. Too often, companies price their goods and services without sufficiently understanding their customers, prospects and competitors.
To ensure your business prices its products correctly, here are five rules:
- Never base prices on costs. Too often, business owners link their prices to their costs. What something costs a small business is rarely related to what the market will pay. Lawyers learned this long ago. They pay less costly staff to complete routine work but still bill the client at the firm's standard rates.
- Price products and services based on the value to the customer. Customers buy holes, not shovels. Restaurants do not price their meals by adding up the cost of food and service. Instead, they create an experience customers will pay more for.
- Price your product to fully cover the cost of selling and servicing the customer. Too often, smaller business owners forget to include all the hours involved in developing proposals, creating trial orders or samples during the sale and after-the-sale-service. Your product's price must reflect the total value of selling and service.
- Only compete on price when the customer and the opportunity are right. If an opportunity offers your business a chance to pick up new skills, publicity or economies, you can price more aggressively. But there are times when customers are not worth the price they cost, particularly those that require (and don't value) additional services.
- Price your products and services differently to prospects, reordering customers and multibuyers. When attracting new customers, create trial size or simple, low-risk products and services designed to attract a skeptical buyer. Price these aggressively to close new business fast. Price reorderable products and services for maximum profitability, as these are the backbone of your company's earnings. Customers will pay more for your innovation and value than prospects, but your new offers won't be as profitable as your reorders.
Just as David's slingshot ultimately felled Goliath, your pricing weapons can have the same impact in your marketplace. The key is to stop trying to use pricing clubs and start learning how to use your slingshots.
Andy Birol is president of PACER Associates Inc., a Solon-based firm that provides expert advice to owners and leaders who need to grow their businesses. He can be reached at (440) 349-1970.