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The problem with pricing products against your peers

April 16, 2015
marketing advice for small business on product pricing

product pricingMarketing advice for small business doesn’t come any better than this piece of advice- get your product pricing right!

Freelancers and small businesses suck at pricing. Yet pricing is the cornerstone of intelligent small business marketing.

Product pricing, workshop ticket prices- the whole nine yards is all determined by the wrong measurements.

There, I said it. It’s in print for all to see. And I’ll probably piss off a slew of people along the way with this lesson, but honestly, it’s been burning inside of me like a string in a Suzanne Vega song. Someone has to say something about this.

The problem is most freelancers and small business owners look over the fence of the next guy and says “my competitor charges X so I should be able to charge X+Y” or X – Y or something the heck based on that original X.

Somehow, the dude with the X next to you has a bigger clue than you do.

Computer says no, people.

Pricing is what makes business viable and because of that, it’s a custom adventure. It’s a mathematical adventure. You need to determine what makes your own programs viable by measuring it against your own business.

Competitor pricing is only a small part of the pricing equation.

Here are the reasons why you need to stop pricing products against what the dude over the road is selling and own your own product and services properly.

Initial stage: Price for adoption.

All the small business marketing in the world won’t save you if you haven’t priced your products for adoption. Have a price that’s too high and you’ll fail to get adoption. And looking at what your competitor charges doesn’t tell you very much about their adoption. The marketing advice for small business is clear- don’t guess your sweet spot lest you damage your ability to scale.

Adoption of a product is determined by a few more iceberg factors than the price sticker:

  • How big a fan base you have
  • How interested that fan base would be in the new product
  • How much of a need there is in the market for your product
  • What problem the product solves
  • Your point of difference from the available options
  • How understood the solution your offering is

So how do you price for adoption over making sure you get to drink Cristal and have a Rolex?

Your adoption phase is part of your market testing. It means offering products at a reduced rate in certain environments to work out how people respond.

This is counter-intuitive to the maxim that some business people have that says it’s easier to lower your prices than raise them. My answer to that one is that you reducing prices from launch makes you look like your adoption hasn’t worked and you’ve had to modify the pricing scale to make your product seem more attractive. After all, to certain customers, REDUCED TO CLEAR stickers are appealing. To other customers, it conjures up images of salmonella poisoning and faulty products.

And yet, I am not advocating for raising your prices after your first test of the market either, because this can also backfire. It can make you seem like a short term player. Or worse, plain greedy.

Yet somehow, the marketing advice for small business you often find on pricing focusses only on what others are doing and not how the market responds.

How do you test for adoption over pricing (or even in some cases, covering costs?):

  • Make it known that you are in beta so that customers expect things to change
  • Test your maiden voyage with a discount or special offer
  • Tie your launch into something that is newsworthy so you gain PR
  • Make your subsequent trials match in conditions so you can test adoption in unknown conditions such as different cities or markets
  • Focus on key metrics such as PR mentions and participation
  • Keep your stats clean. Don’t recycle pages in different markets and make sure you keep an eye on where your conversions come from

And above all else- be prepared to take a hit, but don’t be stupid about it. Create some noise about the product and make scarcity into a tool on your side. Don’t advocate for luxury pricing or base it on your ten years of experience. If it’s a new product, especially if the brand is new, play your Tiger pricing, not your Qantas.

But don’t price so that you set yourself up for a loss, either. And that’s where pricing for profit comes in.

 

First stage of consolidation: Pricing for profit

Create a price that’s too low and you rob yourself of margin, and if you rob yourself of margin for long enough, you’ll go bust. So you need to know the margin you are going to make, and what you need to remain sustainable long term. For that, you need to know your labour and production costs as well as your sales and marketing output. The reason being it’s easier to lower the costs of running a product and its production than any other part of the pricing equation.

The marketing advice for small business here is to work this out, you need to know the maths involved.

Smart agencies and product builders work out cost and pricing ratios. Each employee or account will have a cost to the business. It’s this information they’ll use to see if they have enough money to hire another person and if so, what level that person should be in their career. Or they’ll use it to assess whether a line extension should happen with a company and its products.

But it’s not Mary has a salary of $50K so Mary costs $50K. 

The cost of hiring Mary will be calculated at 1.7 to 2.3 times of what Mary’s wage is. That way, the laptop she has, the electricity she uses and the cost of training her is accounted for. This is a very simple way of looking at Mary and her hiring. But at least it gets you closer to what you’ll need.

It’s not as simple as Fred’s marketing courses costing $100K to produce and having $100K in the bank, either. 

For Fred’s marketing courses, you need to look at:

  • Cost of sales- how much does it cost to manufacture Fred’s courses? This needs to include the labour, the time, marketing, anything and everything that costs Fred money.
  • Fixed costs – these are costs you’ll need to pay no matter what in order to meet the supply of Fred’s courses and may include things like software or the utilities. Or it could be the print out he provides or the appearance fees he pays guest speakers.
  • Variable costs- these are the costs you may have that change because the venues Fred uses changes in cost with the seasons or the city, or the cost of flying from one city to the next changes with what’s available.
  • The profit margin- Fred is smart. So he treats the margin he wants to make on each course like a fixed cost. He looks at it in terms of viability with enrolment numbers and the amount of work he needs to do to make each course a success. He looks at the cost of sales of his marketing courses against what the entire monetary amount for the courses looks like and judges success on the margin reaching that set target.
  • Events of influence- Fred also knows the cyclical moments where his marketing courses may need to be discounted due to lack of interest such as summer when people are on holidays. Or when the courses are in demand and therefore may have a lower cost of sales such as when the latest piece of marketing technology comes out or Google does another update. Fred factors these times when he can charge less and more so that his overall profit margin remains intact.

 

Hard work tastes like product pricing

The issue with pricing is that it’s based on knowing what you are doing. And it’s far easier to look at the market and say “yep, got it- let’s roll!” then dig around in boring figures or do research.

 

However, knowing how to price things helps you market them. And it teaches you how to test for the product’s ability to catch the imagination of the customer. And if you’re a freelancer servicing people with small business marketing, it also teaches you how to look after your client’s best interests.

The marketing advice for small business when it comes to pricing is to be patient.

Plus, if you don’t know how you price your products, how on earth do you expect the customers to believe in them?

You can’t very well justify your prices based on “Well, Cindy charges X so I charge X + Y”, can you?

 

Nor can you count on Cindy to actually make a profit or succeed in getting anything useful out of her newly priced products. You don’t know what goes on inside of Cindy’s business. She could be as clueless and confused as the rest.

Or she could have a massive following she can reach out to. Forget about Cindy. Cindy is good for competitor analysis, not for designing your entire product pricing strategy.

 

Suck it up and do your homework.

 

Enjoy! (well, as much as anyone can enjoy maths).

Want more marketing advice for small business? Check out my blog or get in touch! 

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