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Pricing products and services properly

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Pricing of products and services should be according to the value they provide to specific customer segments - (even if it's just one customer) Now the value has tangible and intangible elements. You need to figure out the value of this and communicate it to these customer.

This approach can help you increase sales, revenues, and profits. Using this, you should be able to generate between 7 and 10% of increased revenue.. :-)

Mostly, you'll increase prices too, but in a rare case, you might drop prices for one key market segment.

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Now read on to figure out how to improve the way you price

Valuation of tangible and intangible benefits of your product or service

  1. Find out your costs. Build a cost model for your business.
  2. Find out your demand curve - a graph that links prices to revenues.
  3. Use excel to build a regression equation for this demand curve. The regression equation is a mathematical formula of the form Revenue = f(Price)
  4. Build an economic model by linking the demand curve regression equation and the cost model. You should be able to plot the graph of Profit versus Price. This is in the shape of a bell curve. At one price point, your profit is at a maximum.
  5. There's another price point at which there are no sales. This is the value you are offering to the customer.
  6. Survey a few of your important customers on what matters to them - tangible and intangible.
  7. Get them to distribute a 100 dollars among these elements. That's the importance they place, and your value distribution
  8. You have a value distribution and you have calculated the value. So you can calculate the value of each element! Taraaaaa
  9. Build stories around these elements and price the product or service to reflect the "believability" of these stories and the value you assigned to them.
  10. Now manage these elements to increase the value you add through them.

How would competitors react

Usually 8 out of 10 times, you will be increasing your price. Competitors usually tend not to increase price with you. You shouldn't have a problem.

Decreasing prices typically is a bad idea. A better idea is to find some way of adding value to the client, and giving it away at a significant discount.

If you are the top 3 in your sector, your prices will be benchmarked, and your competitors will drop prices to join you. Again, please don't drop prices in this case. Find something of value to the customer and give it away.. Consulting services are always a big hit!

If you are not in the top 3 in your sector, your major competitors (those guys bigger than you) won't really benchmark against you. So they won't drop their prices to join you. If you are still concerned but decide to drop prices package it as a temporary discount.

Passing price increases to customers

Don't screw around with your customers. I cannot emphasise this enough. The only reason you should be increasing prices is if you are adding more value. Now you can add value by doing more of the same thing (professional services) or by finding other related areas that you have not helped the client with so far (embedded services for product companies)

Package the extra value item with your existing product or service and set an increased price for the package.

Do an analysis of your customer base. You should certainly segment your customers based on at least the following characteristics
1) revenue of the client
2) profitability of the client
3) percentage share of wallet enjoyed by you
4) your cost of serving the client
5) the customer's ability to do the work in-house or switch suppliers

Pass on your price increases in this order:
1) your new customers
2) your worst customers
3) your average profit customers
4) your most profitable customers

In this way you reduce the risk of failure in your price increase

How do you implement all this? What should you do first?

Well, download the Optimal Pricing Whitepaper (link below) and read it.

Then analyse your business step by step to see how you're performing.

Three price points will be important
1) What's your current price point
2) What's the price point where you make maximum profit
3) What's the price point at which there are no sales.

Now tune your pricing. If however you want a second opinion, do contact us. Our contact details are on our website (link below)

Online resources on pricing

Optimal pricing whitepaper (by Arun)
This is a little 'how-to' document that explains in greater detail, how to price products and services optimally.
Arun Consulting: Pricing, Processes, Venturing (my company)
This is a good way to learn more about my company. It's a clean website, and you won't waste your time reading it.
It's quite cheap to hire us. :-)) And we deliver some phenomenal results.
My blog posts related to pricing
My most recent ideas and some analyses of how other companies are pricing. I spend quite a while sometimes on my blogposts, so they're short, to the point and fairly informative. Enjoy reading them!
Simon Kucher and Partners
This company does work mostly in Europe, and is quite expensive. They do pricing and marketing strategy.
Strategic Pricing Group
This company does work mostly in the US and Canada. They do pricing and marketing strategy. Since they're an American Company, I'd expect them to be fairly expensive.
Boston Consulting Group
This is the old granddaddy of pricing consulting. Ultra good and very expensive, but hey, I got a friend working there, so I'm a fan!
McKinsey Quarterly
There are some nice articles on pricing in the quarterly, but not too many. But in any case, a subscription to this periodical is really useful.
McKinsey and Company, of course, is the largest and most successful management consulting firm in history.

Books on pricing

I know of these books on pricing. Try them out if you want to learn even more.
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pricingconsultant

I live in the Netherlands and run a small consulting company starring myself. I work with a tiny network of freelance consultants and a few companies and... more »

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