Archive for November, 2015

The Cost of a Product or Service plays no part in setting the Sales Price

Great products and services are priced on purpose.  So how do you work out the price to charge?

Although you understand your customers’ needs, we are not experienced with what to charge and often rely on intuition.

A report by McKinsey Management Consultants states that 80% of all products and services in the SME world are priced to low, which fixes the market position at a low level.

Some of the comments at the Business Exposure Group meetings raised some significant points from the members: –

1.Using the ‘cost plus pricing’ method often means that businesses a)      overlook the amount of R & D employed by the Company, and b) often    have over optimistic market projections which is reflected against fixed  costs

2.There is a benefit in having a useless price point. One member has 3 prices a) Web only subscription price of £59 per month b) Print only subscription price of £125 per month c) A Web and Print subscription price of £125 per month.

Option b) seems useless, but it turns customers from being bargain hunters into value seekers as it makes price c) look like an excellent deal.

  1. Charging 1% off the optimal price for a product can mean forfeiting 8% off its potential operating profit.
  1. Starbucks and others changed the concept of buying a cup of coffee from £1 to a drink which costs £4. They did this by changing the experience of buying coffee.  You can no longer buy a coffee.  You have to buy a caramel macchiato or a latte.
  1. Another member who sells phone systems doesn’t ask customers what their budget is for their telephone systems. But moves the buyer into considering how much time staff spend on the telephone.
  1. Another member manufactures soaps. One line was priced at £1 per bar.  It didn’t sell, so the Production Director suggested a price hike up to £6 per bar.  They all sold because the retail buyers though that the product must be a really good quality product.
  1. If a new product costs 15% more to bring to market than the old product, should you increase the price by the same 15%. This was done by one of the members who sells bar coding labels. He made a mistake because he failed to realise the benefits of bar coding over the old product.  ie, instant access to stock control, and the effect of just in time delivery.  The product was priced too low and sold well, but customers would have paid significantly more for the new product.
  1. In order to establish a price ceiling it is important to fully understand how the product or service benefits your customers. One of our members, who sells air conditioning systems, never compares competitors’ products, but explains to the buyer the impact of maintenance shutdowns and lost revenue, demonstrating that buyers will pay so much more for the product.

So, considering the above points as a starter, why is it that SME’s are planning on growing their profits by cutting costs, rather than implementing a less risky but feared alternative? Simply put up your prices, it has the least disruption.

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