Mind the tag! Setting the right price for your services & products
In over 10 years of working in an IT-related field I’ve seen major progress in company images, external and internal partnerships, even in the way companies promote themselves. A single chapter remains overlooked: the price!!!
Surprising how an aspect so important to a company’s market success – the price – is given so little attention in companies’ strategies and even in specialized literature.
A starting point…
There are many ways to set prices, but before we get to that, let’s see to a sensitive issue: which is the real cost? Did you evaluate it correctly and step by step? Do you keep an evidence of the costs of product development in your company? Do you know, for instance, what will be the impact of bringing a new man to the development team or of an updating of the technical infrastructure? These are sensitive subjects which you have to work on with your team in order to carefully monitor the costs at all times.
We have had the occasion to see countless examples of companies complaining of lack of profitability with certain products or services, when in fact the profitability problems were related to other areas of the business. The truth was that they weren’t correctly calculating the costs for each product, service or business field, thus the profitability evaluation being erroneous.
Work with numbers is, by definition, a field that belongs to engineers, and so, surprisingly, not exactly a hobby.
How can the price be determined?
Regardless of the way you calculate your prices (by the hour, the day, or for the project or product as a whole), once you know your costs you will be able to control them and have a effective tool on profitability.
Before you skip to the price, it would be useful to find out what’s the “going rate” in your line of business (see the article about benchmarking), how they form their costs and what “package” does the product come in, what are the sales fluctuations, etc. All of this vital information should one way or the other influence your own pricing strategy.
You company price policy should answer questions like:
- Do you want to work at high price/rates or high quality? However tempting it might be to rush in and say quality, see what the cost for quality is, before going for it!
- Which companies would you like as clients? To which ones can you sell at the target price?
- What are the additional products or services you can sell in order to maximize the profit of an integrated solution?
A healthy contradiction
There’s a lot of “classical ”literature regarding pricing, so I will not insist on this in particular. But, as usual, I have a different view on price: unlike the classics I will not advice you to sell at the highest price, since I think a greater goal is to sell at the price that helps on maximizing profits.
However, in order to determine the price that will maximize the profit, I always suggest that we start with the highest reasonable oneJ. It’s much easier to lower the price than to try to increase it afterwards, in establishing a ling-term price strategy.
When the price works for business development
When it comes to pricing, we should have two ground rules in mind:
- Never increase the price more than is “reasonable” and “justifiable” in the eyes of the client. This carries great impact on how you are able to convey value to your customer.
- Sometimes a deal can be accepted at minimum level of profitability, in particular if we want to get a certain client. Make it worthwhile! If you sell low, make sure you get most out of working with the client (references, testimonials, case studies etc)
There are many applicable pricing strategies which respond to the needs of every business, including when it comes to promotion programs. I do not recommend them! The price is a tool that must be used with caution otherwise it might turn against us. We can use such strategies when there is so much competition in line of business that pricing remains the only “fighting tool”, but even in such cases I recommend that it is used with caution.
Presenting the price
The price is presented to the client in the form of the price proposal or the company’s overall proposal. The proposal’s format and the way you present it are very sensitive aspects.
The price must be easy to understand, easily perceived as a value, not a number written on paper, it must be justifiable in terms of the client’s needs and possible investments.
How do we increase the price?
The most frequent issue I’ve encountered it’s not how to increase the price, but how we give the client an extra discount. In reality, the increased performance is dictated by price increasing, not cost lowering and other restrictive measures.
And, most important, why do we have a problem with demanding a higher price? The main issue is value. We do not perceive or do not know exactly what the value we offer the client is. Though the understanding of the value we offer is an internal evaluation process, in a future post we will speak about different ways of increasing value. Before the next post, you might consider asking yourself: how much is your product or service really worth for a client?