Why the Best Pricing Strategy requires you to ask: What do Customers Want?Last Updated: May 1, 2019
The best pricing strategy requires you to ask yourself: What do customers want? ActionCOACH Shweta Jhajharia looks at the distinction between value & price, to enable you set the right price with complete confidence.
When it comes to the best pricing strategy for your business, do you worry about your competitors undercutting your prices? Are you often adjusting your prices in a bid to attract new customers? If you’re concerned, don’t be. And if you think cheap price is what customers want, then you’re focused on the wrong thing.
What you need to do is to make a distinction between price and value. There is no major scientific formula required, simply a basic mathematical one, and the need to re-set your thinking, not your prices. You must concentrate on the value of a product. Once you do that, you will charge the price that’s right, and be confident in doing so.
Here’s a video in which I look at devising the best pricing strategy by exploring the difference between price and value. If it’s inconvenient to view the video now, just scroll down and read the article instead.
The Best Pricing Strategy – My Trip to the Toy Shop
I’m going to tell you a very simple story about a recent visit to the toy shop with my eight-year-old son. I wanted to buy him a toy, and I left him to look at what was available in the shop. Eventually, he chose one and said to me, “Mama, I want to buy this toy.”
It cost around £5, and I said: ”No, I’m not so sure I want to buy that one for you.” So after a while he picked up another toy that cost £15. I said: “Yes, let’s go for it. It looks interesting.”
Afterwards, my son looked a bit confused, and he asked me why I’d said no to a toy that cost £5 and ended up spending three times that amount. Very valid reasoning from an 8-year-old. But what he was doing was comparing the price of the toys. I was comparing their value.
That’s why when we think about what customers want, it’s important to focus on the difference between value and price, particularly in a sphere where we so frequently use terms like “value for money” and “extended value to customers”.
But when devising the best pricing strategy, how accurately can we define the concept of value. Here is a simple mathematical formula.
The Value Formula: Value = Benefits – Cost
Take note of this and put it in a place where it’s always handy for you to look at. Or even better, repeat it and memorise until it becomes second nature. Value is Benefits minus Cost. Right?
There are at least two ways, or a combination of ways, in which you can increase value for customers. One way is to reduce the cost. The other is to increase the benefits. If you go for the second option, the value for your customer increases.
To understand what customers want you must understand also that the price of your product is also the cost for your customer. The benefit is the problem that they are solving by using your product or service, or the situation that they are improving with the help of your business.
While business owners are generally keen on increasing value for customers, they usually reduce prices or make offers that bring the price down. But it’s not the only strategy, and it’s actually a very expensive approach that we will look at in a future post.
For now, it’s recommended that you think about increasing the benefits for customers, and communicate these benefits clearly to the customers. What you should be doing is not discounting or slashing prices. That is not the best pricing strategy. Instead, set a price that is based on the value you are extending.
What customers want is not the cheapest prices. What customers want is to minimise values for themselves.
The prices you charge do relate to material costs, time and effort on development and extension of the service or product. But they are not the only thing!
Always focus on what benefit you are providing to your customer. Think about what your product or service means, in terms of emotional value to customers; and of the material value they derive from your business. Only then can you set the right price.
Finally, make sure to examine and reexamine the value formula above very carefully, and then go back and see how you can increase the value for your customer. Remember — take massive actions for massive results!