One of the most confusing things a business owner ever has to face is setting prices. When you first start a business there are a plethora of books and guides, but it can be hard to peg exactly what dollar value to assign to your product or service.
A scan of competitors is a good place to start, and usually, you’ll have an idea of what the industry standard is, but then you have to gauge how much profit you are willing to sacrifice on each unit sold in order to price as competitively as possible.
Then comes the second-guessing – are you going to market at too high of a price, or are you coming in too cheaply – which is possibly the worst part. One of the biggest problems is that unless you already have an existing network of contacts it can be tough to find pricing advice.
Some businesses, particularly the funky new startups, are lucky enough to have a business idea that is so fresh and new that it basically sells itself. Unfortunately, not everyone can invent a better kind of mousetrap, and most will have to do the hard yards with an effective pricing strategy rather than just launching a site and having overnight success.
The days where you could launch something – particularly online – and not be up against much competition are pretty much over. Unless your niche is clearly defined, then you’re going to rub up against other businesses offering a similar service and differentiation will be key. It’s one thing to price with respect to how much you think your time is worth, it’s quite another to have an effective pricing strategy that is properly aligned to the market and your brand.
To find out just how tough it is when starting out, Nett spoke with a number of small business owners to share their pricing stories
Jet Force Plumbing
For Luke McCarthy, plumbing is something that he has been involved in for more than a decade. He’s worked for some of the largest companies in the construction industry and worked on iconic projects such as World Square and Star City Casino in Sydney.
Just over seven years ago, Luke decided to start his own plumbing business and gave up the massive construction sites for a smaller scale business that focused on quality services.
“I wanted to pass on my knowledge and create a successful business that brings a service and quality of the workmanship like no other company in the plumbing industry,” he explains.
His background in the industry gave him a good nest of contacts to draw on and a general understanding of what people were charging for plumbing services in Sydney. But he took it a step further to make sure he knew the lay of the land with the competition.
“I’ve rung several plumbing companies to see what their hourly rate and service charge is,” he explains. “I then calculated my monthly expenses and set my prices in order to represent the best value for my customers at a very competitive rate to my competition.”
Laying this groundwork back in 2006 meant that Luke had his prices squared away from the very beginning, and hasn’t changed his rate since he first opened.
“I have not changed my pricing structure since starting Jet Force Plumbing Services, as I have a good loyal client base who I don’t want to lose due to price increases,” Luke says. “The plumbing industry is very competitive, so the market doesn’t really allow for a price increase even though inflation and our increased running expenses would make it necessary.”
If Luke was starting the business over from scratch he wouldn’t change his attitudes on pricing, but that doesn’t mean he hasn’t learned a lesson or two over the years he has been in business.
“I would not have done anything different with my pricing, but I’ve learned over time that a lot of people do not like being charged a service call fee – which is a charge for the time it takes to get to the job,” he explains. “I’ve decided to only charge a service call fee when absolutely necessary, for example when the job is not in my local area and I would take a long time to travel to it.”
In Luke’s mind, the main thing is to always keep your pricing reasonable and think about it from your customer’s point of view. He tries to think about what he would consider a fair charge if someone was doing the work for him.
Chris Ball has always loved traveling. He’s one of those charismatic types with an effortless smile and enough charm to make friends in every city. To hear him tell it – before he became a small business owner – the credit crunch seemed like a good excuse to hit the road for a year.
“It was a year that included a bicycle ride across continental Europe, a kayak up the length of the Dead Sea, a trek around Patagonia, and spending time with locals in the Colombian Amazon,” he recalls.
One of the things that really struck Chris on his travels was that while it was easy to search and book accommodation and transport, it was much harder to find the best tours and activities.
“I like and lust for travel, but my business idea was seeded by my own pain traveling,” he says. “When traveling, it’s relatively simple to search and book accommodation, flights, rental cars, etc online, but kick-arse tours and activities – those really awesome experiences you hunger for – was much harder.”
Out of this experience came AdventureHoney, his startup that was launched in November 2012 and currently offers a number of tours in Thailand – from cave kayaking by starlight to white-water rafting and cliff diving. Chris points out that his pricing strategy is based on analyzing how it’s being done elsewhere and then asking how it could be done better.
“Our customers pay exactly what they would pay if they booked directly with the operator locally,” he explains. “Meanwhile, we help tour and activity operators fight back against the inevitable ‘race to the bottom’ that ensues when a strategy of heavy price discounting is employed.
“We do this with a more balanced marketing focus,” Chris adds. “Yes, price is important, but we firmly believe a greater focus is required on what makes the experience unique – such as people and price – if operators are to repel commoditization of their product.”
Cian McLoughlin had been working in the sales software industry for over 10 years and had been involved in hundreds of business-to-business sales cycles before he founded Trinity Perspectives. This included a stint at SAP, which provides enterprise-class customer relationship management software to some of the biggest companies in the world.
“I realized the way clients were making purchasing decisions was changing rapidly and that a lot of enterprise sales organizations were struggling to change their business practices to accommodate this new purchasing approach,” he explains. “Trinity was founded to help companies make this transition more effectively and assure they stayed relevant and ahead of the sales curve.”
When Cian started Trinity Perspectives two years ago, he was focused on helping much smaller businesses than the ones SAP dealt with, but he leveraged his decades of experience.
“One of the lessons I learned in the corporate world was to build for the future, by putting in the right infrastructure early,” he says. When it came to setting his prices, Cian found it tough as a service-based business.
“I had some interesting challenges when setting my prices,” he recalls. “When I finally decided on a pricing strategy, I decided not to focus on what other suppliers in the market were charging, but rather on the value which I felt my clients could derive from the service I provided.”
Cian is quick to point out that while this may seem a little counter-intuitive, but he firmly believes that by making the focus of his pricing model on client outcomes, it transformed the conversation he would have with his clients.
“I did a lot of research before deciding on the Trinity pricing model and discovered that a large number of companies, particularly in the professional services space, set their price point too low,” he says. “Having set this initial expectation with their clients and prospects, it makes it extremely difficult to increase the price point in a meaningful way.
“On that basis, when I first set my pricing model two years ago, I focused on achieving a realistic level and haven’t felt the need to change them since that time.”
Your Contact Solutions
Melinda Charlesworth spent eight years in the call center industry, and 15 years before that in the IT industry, before she started her own consultancy firm called Your Contact Solutions.
“I wanted to work for myself and to have some flexibility and work-life balance,” she says. “I have four children, and I started the business when my third child was 10 weeks old. I also wanted to share some of the things I had learned over the years with other businesses.”
When Melinda first started out five years ago, pricing was one of the toughest challenges to come to terms with.
“Firstly you need to know what you are as a business,” she explains. “You can bet that when it comes to cars, Kia and Mercedes have very different pricing strategies. Both are great brands, but they stand for different things.
“Ask yourself if you are Kia or Mercedes? Or something else entirely – it doesn’t matter – but you must know which business you are in.” Melinda believes that you either have to choose a model based on your costs plus a percentage for profits, or a pricing system based on the market.
“I believe when you are pricing services you need to go with a market pricing model and this is ultimately what I did,” she explains. “I see many new business owners under-price their services because they don’t have the confidence to price at the market rate.
“Underpricing your services won’t win you business – people will think you are cheap because you aren’t as good as the others.”
For Melinda, what helped the most was networking with other people who offer the same sort of services and actually asking them what they charge. This can be tough for many business owners because you are putting yourself out there.
“Far from being an awkward conversation, I actually found that once I raised the subject with a couple of contacts over coffee the information flowed freely,” she explains. “They were all quite relieved to have the conversation as all, like me, were struggling with the same issues. We laughed about it later and realized we really should have had the conversation months earlier.
When it comes to a market pricing model, Melinda believes it can work for products just as easily.
“I bought my son a skateboard the other day for $150 – it was the latest trendy brand,” she recalls. “Kmart sells the same thing for $30 but as it is not the ‘cool brand’ the kids don’t want it. But who determines what is the cool brand? If your brand is properly placed and is a comparable price, it may also join the [cool club].”
At a conference in mid-2010, Jon Manning was doing the rounds at a networking function and the chatter was about pricing and crowdsourcing. He was approached by someone about to launch a product and was asked how much to charge for it?
“At that moment I realized that people had been asking me that question for over 20 years, and rather than answering ‘that depends,’ I could provide a more specific answer if I created a platform that crowdsources the answer.”
That light bulb moment leads to the creation of PricingProphets, a website where a panel of what Jon claims are ‘global pricing experts will tell you what price you should charge and why.
“I have always worked in pricing, but for the last 10 years I’ve been consulting to companies on their pricing strategies – mainly large corporate – but the occasional small-to-medium enterprise (SME),” Jon says. “I realized that SMEs also needed help with their pricing, but they didn’t know there were pricing experts around. If they did, they assumed such services were beyond their means, so they resorted to the flawed pricing methodology known as cost-plus pricing.”
Cian’s top four
Cian McLoughlin is the founder of Trinity Perspectives, a software company specializing in sales and after-sales technology. He has a number of pricing tips from years spent in the industry.
1. Don’t set your price point too low. A large number of companies make this mistake and their margins are impacted accordingly.
2. Know your value and, if you are entering a competitive market, find other areas to compete on than price. This can include quality of service, industry expertise – anything that will help you to differentiate but won’t eat into your margin.
3. Ask for an upfront component and strictly manage your debtor’s pool.
4. Don’t give away your goods or services for free unless you are receiving something tangible in return.
Melinda’s top 10
Melinda Charlesworth is the founder of consultancy firm Your Contact Solutions, and also serves on the board advising a local marketing firm where she helps guide them on pricing. We asked Melinda for her top 10 pricing tips.
1. Know what sort of business you are in, and who you want to be.
2. Network with others in your industry to see what the market price is – you will be surprised at how willingly people will share if you do too.
3. Don’t underprice – you devalue the whole industry and damage your own worth.
4. Discounting is not the same as underpricing, but make sure your customer knows the full price.
5. Be flexible – be prepared to price each job individually based on circumstances.
6. A long-term, the mutually beneficial relationship can be worth a reduced daily rate.
7. If you can reduce your costs, you can actually increase your profit without increasing your price.
8. Know all your costs, if you don’t measure them, you can’t manage them.
9. Always give great customer service. It’s much cheaper to keep a happy customer than to get a new customer.
10.Make sure you give your customers value and make sure you show them where the value is.
Jon’s top 10
Jon Manning is the founder of Pricing Prophets and makes a living helping other businesses with their pricing. We asked him for his top 10 pricing tips.
1. There’s no such thing as a pricing laboratory. There’s only the real world and that is where you need to experiment with pricing.
2. Pricing is a process, not a project that you look at once a year.
3. Move prices and value up and down together. The best way to increase prices is to increase value. Conversely, if customers want a sharper price, take away value.
4. Never under-price a new or revolutionary product or service, as it’s generally easier to go down than up. Think of the original iPod: when it first came out, people thought iPod stood for ‘idiots price our devices’.
5. Understand value from the customer’s perspective. What you think is of value may not be what the customer actually values.
6. Avoid cost-plus pricing. Customers buy from you because of the value you provide them, not because of what it costs to manufacture a good or provide a service.
7. Think about ‘getting’ prices as well as setting prices. Your terms and conditions are key factors in determining whether a customer buys from you or not.
8. The days of across-the-board price increases are coming to an end. For pricing, opportunities look at individual products, families of products, customers, or customer segments.
9. Don’t leave pricing decisions too late in the marketing process. Think of them as a product development decision, rather than a go-to-market decision.
10.Find out how your customers make purchase decisions and adjust accordingly.