Pricing 1: The Most Powerful Tool in Business

Pricing plays a critical role in a number of aspects of your business, most importantly in determining the margin at which you sell, but also plays a key role in reinforcing the value message that you send to the market. Pricing is also the area where I see start-ups through SMEs make significant errors, be it pricing an equity offer for a start-up or pricing a product or service to government, business or consumers.  Interestingly, in my experience, the error is almost always to the low side, and to the disadvantage of the business.

Why is it always to the low side?

I consistently encounter the same reasons:

  1. The business sees the market in which they sell as being highly competitive.
  2. The business is not clear on how their product or service is, or can be, differentiated.
  3. The business believes that their customers buy based on price.
  4. The business does not understand the value they deliver to their customer regardless of if it is a B2B, B2G, or B2C transaction, although the business almost always believes they clearly understand the value they deliver.
  5. The business believes in the theory of supply and demand. (Hint, this theory applies to virtually no real business)
  6. The business is afraid to be the highest priced product or service in its market for fear of losing business.

As a result of these and other factors businesses tend to price low, whether it be an equity offering, product or service, relative to the value they provide. They also often select as their first strategy lowering price in order to grow sales or combat declining sales.  (Don’t do it)

In my next few blog posts over the coming weeks I will discuss many aspects of pricing with the ultimate goal of helping you sell your products or services at high margins in competitive markets. We will be discussing:

  • Pricing fallacies
  • The impact of price on both sales volume and profit (margin)
  • Developing your value proposition and pricing strategy
  • Selling at higher price and margins in competitive markets

If generating more sales at higher margins is of interest to your company, please contact us.