HOW TO ADOPT A PREMIUM PRICING STRATEGY
Pricing is often one of the most perplexing issues facing small business owners. “How much should I charge?” is a common question and there are a lot of variables involved in getting it right (and usually the ‘right’ answer is only right in particular contexts or situations).
Price too high and you could price your products/services out of your Customer Segment’s budget. Price too low and you could create an unsustainable business model, where gross profits are too low to cover your operating costs - which eventually leads to bankruptcy. Price too low and you could also lower the perceived value of your product, paradoxically leading to fewer customers than with a higher price.
With that said, I can tell you definitely, having worked with hundreds of startups and small businesses, most of them undercharge for their products and services, sometimes grossly.
‘I NEED TO CAPTURE MARKET SHARE’
The theory behind pricing lower than your competition seems sound: ‘If I price lower than the competition, then value-conscious customers will choose me.’
The problem with that approach is that it’s a race to the bottom. Unless you’re Walmart or Amazon with almost limitless money to burn and investors with deep pockets, your positioning strategy shouldn’t be to based on price competition.
Note: even business darlings like Amazon are facing big problems due to a low-price strategy. Amazon is losing billions of dollars on shipping because of their free-shipping policies; having set the bar on free shipping and having forced competitors to follow suit, they’re now in a precarious position where they can’t afford to abandon a strategy that is causing them to lose huge money.
This is an even more acute problem when you’re a startup with no name or brand recognition and you’re competing against established companies.
Adopting a low-price strategy is a loser for many reasons [CLICK TO TWEET THIS]:
RACE TO THE BOTTOM
Someone will always be willing to go out of business faster than you. Unless you’re in the rarefied air of a no-competitors white space (rare indeed!), you’ll have competitors. And even if you price lower than your competitors, someone will come along and price lower than you, capturing your customers whose only consideration is price.
Price is a strong signal of value
Price lower than your competition and the signal you’re sending to your prospects is "we offer a bargain product and bargain quality.”
Low prices equal low margins
When you pursue a lower-price strategy, it kills your margins and you have to make it up on volume. This is turn forces you to spend more money on marketing, further eroding your bottom line. Again... a race to the bottom. Do you have $30M in venture capital to afford to join that race?
Price-conscious customers are often the most demanding
After 19 years in business, I can say unequivocally that the people who are looking for the best deal are almost always the people who are the most demanding.
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A BETTER STRATEGY: PREMIUM PRICING
People will always pay for high quality. [CLICK TO TWEET THIS]
In late 2013, I ran a lot of financial projections and spreadsheets for my company. No matter how I ran the numbers, it was clear we weren’t charging enough for our trips, and our margins were too small to deliver healthy profits.
We decided that we were going to raise our prices, and raise them significantly - an average of 30% across the board. I was nervous (OK, borderline terrified) about how this would affect our revenues. Would our customers stop coming to us?
In advance of the Jan. 1, 2014 price increase, we notified our customers that our pricing was going up, but that they would have 2 weeks to book a trip at the old price. We also announced a slew of customer service improvements (such as guaranteed departures and lifetime deposits), that we knew had a high perceived value to our customers. That led to our busiest month ever (a record that stood for over a year until it was eclipsed this past March).
I then anticipated a big slowdown in the first quarter of 2014, but after a so-so January, our sales picked up again in February. Now, 14 months later, our sales are up by over 80%, which includes customer growth of over 50%.
Clearly the price increase didn’t deter many people.
And... we raised our prices again a month ago, and we still haven’t seen any dropoff in customers. Our new pricing now allows us to deliver an even higher level of service.
The key to charging a premium price is figuring out what your customers really value, and offer that to them better than anyone else can.
Figure out what their biggest peeves are with your industry and then figure out a way to address their peeves. If you can do that, you can charge significantly more than your competitors. You’ll also have healthier margins, happier customers, and fewer headaches.
CONSIDERATIONS WHEN PRICING
Regardless of which pricing approach you take, there are a few considerations you should take into account:
Know your numbers
You need to know your most important cost metrics, such as fixed costs, variable costs, and operating expenses. Once you know these numbers you can run some more calculations to figure out your pricing and gross margins.
Pay yourself
I’m always amazed at how many entrepreneurs will run financial calculations and projections that don’t include paying themselves. How long is that sustainable? Include a salary for yourself, one that reflects the opportunity cost of your working on the business (and not at another job). Otherwise your financial projects will be grossly distorted - you need to eat!
Adopt the right pricing model
There are many ways to charge for your products/services: one-time sales, membership models, subscription models, payment plans, etc. The key is understanding your customers and their unique needs. Even if you decide you want to price higher for quality.
So, in a nutshell… don’t underprice. Price higher and over-deliver - that’s always a winning strategy. [CLICK TO TWEET THIS]
What are your pricing issues? Thoughts on pricing? Let me know in the comments below!
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