Updated: Sep 10
To achieve your desired profit margins, you need to be systematic when setting and evaluating your pricing.
If you're like most entrepreneurs, you may think you suck at setting your prices. You may have settled into a pricing methodology that fits snugly in the middle-ground of your competition: like Goldilocks -- not too hot, not too cold, but just right. You have a decent win rate, and your pricing strategy seems to be working for you… Or is it?
If you are like most of our clients, you win deals, you lose deals, but a little voice in the back of your head always second-guesses how you priced that last sale.
If the client accepts your proposal, you think, “Did I leave money on the table?” Alternatively, if they reject it, you automatically think "Was my pricing too high?"
You’ve probably settled into a pricing method by trial and error: you’ve priced too low and got killed on margins, and you’ve also tried the “shot-in-the-dark, see-how-high-you-can-go-before-the-prospect-gasps” method, lost the deal and found out the upper limits of what you can charge. There's more science to it than you think, and it certainly doesn’t always have to involve sticker shock.
Traditional Pricing Structures
First of all, remember that your pricing is a crucial signal to your customers about your product or service. It’s probably the most significant reference point from which they categorize you vs. your competition.
If your prices are low, it signals either poor quality or you are positioning yourself as a commodity. If you price in the middle of your competition, you will have a hard time differentiating yourself. If you price at the upper end of the market, it signals higher quality, but also reduces the chance of closing as many deals.
Most companies figure out their pricing by assembling their costs and adding a mark up on top. This bottoms-up pricing may work to cover costs and may keep you profitable but it’s a less-than-ideal option.
Because cost-plus pricing leaves money on the table. This bottoms-up pricing approach caps the amount of margin you make to your markup, but you also don’t know what the client would have been willing to pay for your product or service. Secondly, when we have done post-mortem pricing analysis, clients nearly always forget costs that should be included in the baseline for markup.
A Better Way: Start with the Value You Provide
Value-centric pricing captures the advantages you provide to your clients, and ensures that you both share in the profits of the engagement. It starts with making sure you quantify and qualify what your products and services will actually do for your prospective customers.
Bain and company has fantastic infographic called the Pyramid of Value. In it, they outline the hierarchy of values in a B2C sale. We’d argue that it applies to B2B sales as well, because, after all,a sale is a person-to-person transaction.
When valuing your product or service think along the Bain Pyramid of Value. Review your product or service to see how it meets the following values:
Time/ money saved
Organizes, simplifies, or streamlines
Reduces stress, anxiety
Provides access, rewards, or makes the client “look good”
Makes them feel like they are affiliated with people they admire
Helping people or society broadly
The more you work your way up the pyramid of value the more value you provide, and the higher prices you can charge.
Pricing Isn’t Just a Math Exercise.
To communicate your value, your pricing needs to go hand-in-hand with a strong marketing and messaging strategy. When people lose deals or fail to gain subscribers, they will often default to lowering prices or discounting in desperation, trying to find that "right price" that will get clients to buy, which ultimately ends up somewhere in the middle (see "Goldilocks" pricing strategy above.)
Because pricing is a signal to the market, you will loose deals if you have a Wal-Mart-like image and you try to charge Nordstrom-like prices. Again, it's about perceived value, and each customers' perceived value is going to be different. That is why you need to price the customer, not price the product.
Learn from Your Mistakes
Pricing is a dynamic exercise, and one way to make sure you get better at it is by making sure you are doing post-mortem analysis on job and product line profitability. (Better yet, make sure your accounting system is set up to do this for you!) If you don't have a laser focus on your costs, you'll repeat the same pricing errors over and over again. Tracking expenses-- especially W2 labor-- to a job or product line will help you see your performance at a level in which you can act. Instead of looking at your P&L in total and wondering why your margins aren't in line with expectations, with job costing you will be able to narrow down the focus-- and action-- at a customer level.
Take Rejection in Stride
Try to remember that not every rejection is a result of your pricing. Instead, there might be countless other issues, and many of these are often out of your control in the moment.
Whether it’s a culture or market fit, mismatch with the vertical you serve, or the features aren’t what your customer needs, pricing isn’t always to blame for a lost sale.
So, if you have a sucky pricing model, there are some definite actions you can take to turn things around. Make sure you have a good grasp of where your product or service falls on the Value Pyramid. Then make sure you can communicate your value, backed by strong marketing & messaging. Lastly, pricing is a dynamic exercise... make sure you know your costs and can measure product line or customer profitability to get better at pricing each new deal.. otherwise you could be missing out on some worthwhile and profitable opportunities.
If you need help setting your pricing strategy, quantifying the value you provide to clients, or need help on setting up your accounting system to yield product or customer profitability, drop us a note, we’d be happy to help!