The Psychology Of Pricing

Price Value Scale Concept

By Anton Ressel

One of the most common challenges facing the entrepreneurs and small business owners I work with, is uncertainty around the correct strategy as far as the pricing of their products and services is concerned. This is not a surprise, because unlike costing, which is a more precise and exact science, the psychology of pricing is murky and influenced by many factors.
These include the nature of the product or service, the target market at whom these products and services are aimed, brand equity and brand positioning, distribution strategy, the scarcity or availability of the commodities in question, right down to factors such as packaging, product quality, originality and even current trends. In fact, the variables are so many and varied that it may sometimes feel like one needs to be part actuary, cost accountant, marketing guru, MBA and psychic to stand any chance of getting it right.
Frankly, it need not be that complicated. While I would caution against simply whacking 100% on to your costs as many do to arrive at their selling price, if you follow a few fundamental truths you should be able to arrive at a price that is right for your customers, your stakeholders and your business.

Know your Costs
This is a non-negotiable part of arriving at a sustainable pricing strategy. Simply put, if you do not know what a product or service costs you to make or deliver, you are not in a position to set a price for it. Understanding your costs is so fundamental to business success, not just as far as pricing goes but also in terms of managing production and input costs, maintaining healthy cash flow and optimum allocation of resources. Knowing your costs also empowers you to negotiate prices with greater confidence, so make sure this is an area that you or someone in your business understands well.

Add Value
Studies have shown that many consumers, especially those in the higher LSM (Lifestyle Monitor) brackets, do not view price as the most important element when deciding which product or service to choose. They are more concerned with value than price – in other words, people will pay a premium price, as long as they feel they are getting value for their money. What this means for your business, is that your job is to find ways of adding value to a customer who buys your product or service, rather than simply trying to offer a cheap price. In fact, you are often better off charging a higher price, but offering extra value. Some examples might be a 5-year guarantee on the product, a loyalty programme (previously seen as the domain of the big brands only, but not anymore), two-for-one promotions, social media competitions and giveaways, and any other activities that create the perception of good value in terms of your product or service.

Discount Strategically
One major Achilles Heel of the small business sector is the lack of a sustainable and well thought-out discounting strategy, especially when one is just starting out and eager to secure business at all costs. A strategy for discounting may sound like overkill, but consider this – if you offer your existing client base a discount of 10% on your current GP (Gross Profit), you will need 50% more customers to make the same turnover as you are currently making. Let that sink in for a moment….if you have ten customers, and you decide to discount your GP by 10% to give them a better price, you will need an additional five BRAND NEW customers just to make the same turnover – maybe a discounting strategy is not such a bad idea after all? My philosophy as far as discounting is concerned is a simple one; it has to be a two-way street. ‘I give you a discount, and you give me something back in return’ is a pretty good strategy to follow – whether that something is a bigger order, more favourable payment terms, a longer contract period or some form of brand exposure or promotion is not crucial, what is important is the fact that you are discounting strategically and getting something back as a result. The alternative, is just taking money from your pocket.

Be Ready to Defend your Price
Any buyer worth their salt, will question your pricing and try and squeeze you for a better price. It is what they are paid to do, so rather than get angry or impatient, be prepared for such an eventuality by making sure you are able to defend your price when called upon to do so. You do this in a number of ways – excellent product knowledge, an understanding of your competition and what they offer (and charge) for similar products and services, a clearly defined set of USP’s (Unique Selling Propositions – what makes your product or service different or special) and most importantly, the confidence and belief in your product or service to stand your ground when necessary. Rather lose a sale in the short-term, than be bullied into selling at a bargain basement price – nothing kills a business quicker than selling at or even below cost for an extended period, unless there is a very strategic reason for doing so.
As I said at the outset, pricing is not an exact science. However, by blending a bit of confidence and common sense with a more long-term and strategic approach, you should find it possible to develop a pricing strategy that fulfills its primary aim – to make your business profitable, sustainable and fun!