Whenever I start a discussion with business owners about pricing – especially implementing a price increase – I encounter a considerable degree of resistance. I hear things like “Are you nuts? – My customers won’t pay a penny more!” or “My competitors are cutting prices and I am forced to discount to keep the business”. The pricing discussion is therefore critically important and directly affects the business’s profits. It is worthwhile to consider the following facts about pricing and differentiation.
Q: Why do customers purchase from you?
A: Customers buy based on value perceived.
Customers don’t make their purchasing decisions based on price alone – they make the decision based on value perceived for the price offered. If you are getting price resistance, it is because the customer doesn’t appreciate the value offered or because you haven’t differentiated your product or services properly. Differentiation is the way you position your product or service so it is unique from your competitor and the difference has an added value to your customer.
As an example, I have a contractor client who has a reputation for consistently showing up to a job on time. This reputation is a good differentiator and he consistently obtains contracts that are priced higher than the competition (but still fair).
Position value up front
Even for a business that is different and has value-added products and services, they often don’t position the perceived value properly at the time of the purchase decision. This may be because a salesperson wasn’t trained about the added value. It may also be that the customer’s needs and frustrations aren’t completely understood and thus the different benefits aren’t properly explained.
A good example of positioning value upfront is a business that has a guarantee or a return policy, but the customer isn’t told about it when making the purchase decision.
Is the business owner price sensitive?
The third challenge I often uncover is the amount of price sensitivity that is in the owner or salesperson’s own mind. When the owner isn’t confident of the value proposition, it is difficult to build the confidence of the team or the customer. There may also be members of the sales team that aren’t as confident in the value provided for the price offered.
As an example, I have a hot tub retailer client who had a high-end hot tub on the sales floor. The young salesperson couldn’t afford the tub and wasn’t sure why anyone would pay that much for a hot tub. It was no surprise that this particular salesperson didn’t sell any of those high priced hot tubs.
In summary, the pricing and position strategy you implement is critical to differentiate your products and services in the marketplace. Being the lowest price is a slippery slope to bankruptcy. Listen to your customers to make sure you understand how they perceive your value offering. Then have a good pep talk with yourself and your sales team about why you’re different and provide exceptional value for the price you charge.