One of the biggest mistakes many make in marketing (myself included) is looking at pricing as an analytical exercise. Often pricing strategies are decided by creating a spreadsheet of competitors, what they charge and what is included in that charge. Another sheet is developed listing the costs of producing a product and service. Between these competitor prices (top) and cost data (bottom), a final price is determined. While these data points are helpful, the truth is:
People buy emotionally and justify intellectually.
Pricing is really about setting a number to a value exchange – the customer receives your product or service and then pays you the value received.
So the best approach to establishing an optimal price whereby you get the maximum money for the value you are creating is to follow the five C’s of pricing (from The Strategy and Tactics of Pricing):
- Comprehend value to customers. Talk to customers and get at what they are really buying. The car may embody a personal identity or be a simple means of transport. Their investment portfolio management may be more about creating enough to retire comfortably, rather than beat the market. Talk to them, and get to the heart of what they really want, not what they think they need.
- Create value for customers. Your value is not just your product but also your brand, your convenience, your service delivery, your financing. Align the entire client experience with what is of value.
- Communicate the value you create. Sell in terms of the emotional value to the customer rather than the features and functions of your offering.
- Convince customers they must pay for value. Stand your ground that for the right customers, you create value that is worth x (your price). Be convinced yourself of this, before you start selling others.
- Capture value with strategic pricing based on value, not costs and efforts. Being clear on this will allow you to create a truly profitable business