The Price is Right. Or is it?
Back when I was in college I won the showcase showdown on the TV game show The Price is Right. (Unfortunately it was shortly after Bob Barker retired). So I like to think I have at least a little bit of credibility when it comes to pricing.
How did I win? You can read more about that here if you’re interested, but in this article I’m going to be sharing some advice about pricing your services or products. For more strategic accounting advice from our Bay Area experts, check out our other blog posts
A brief overview of pricing strategy.
Setting the right price for your products or services can be a daunting task, but it’s a critical aspect of running a successful business.
Simply asking your peers how they price their services won’t cut it. To create a solid pricing strategy, you need to consider various factors that play a role in determining your pricing ceiling and floor.
As a strategic accounting firm, we see many businesses with pricing that is not in line with their overall strategy. It manifests in a number of ways. In this article, I’m going to discuss pricing and the 8 steps to getting it right based on your profitability, client retention, operating margins and more.
Step 1: Determine your floor and your ceiling
Charge too little and you can’t make a profit. Charge too much and you will lose clients.
The floor is the minimum price you can charge to cover your expenses and provide an acceptable profit margin. It’s worth noting here that many companies do not have a full understanding of their total costs of delivering their services, and that is why despite having decent sales results, profit margins lag.
The ceiling is the highest price you can charge before clients start to seek other options. If the quality of your services justifies it, and demand for your services is high, you can price closer to the ceiling than the floor.
Step 2: Decide if you want to maximize revenue or profits
Lower prices attract more customers, increasing revenue, but potentially lowering profit margins. On the other hand, higher prices can yield more profit per sale but may affect your close rate. Finding the right balance between revenue and profit is vital.
Want to sell your business in the next three years?
Revenue growth might be your goal as you seek to get a higher multiple upon your exit.
Looking for a lifestyle business that you’ll hold onto for a long time?
You’ll want to focus on profits, which means you’ll be more picky when it comes to taking on customers. You’ll grow slower but your profit margins will be better than your quick growing competitor.
Step 3: Know your customer demographics and willingness to pay
Understanding your customers’ demographics and their ability and willingness to pay is crucial in pricing your offerings appropriately. Customers in higher cost of living areas will have different expectations around pricing than those in more rural/lower cost of living areas. Again, this is why simply asking your peers how they price their services is not a bullet proof strategy.
Step 4: Increase demand to give yourself better pricing power
Demand plays a crucial role in pricing power. When demand is high, you can charge premium prices. Business development and marketing efforts can help create and stimulate demand, allowing you to command higher prices.
Step 5: Understand that pricing is elastic
If demand is challenging your people’s ability to deliver services or you’re running out of a popular product, your first instinct might be to hire more people or order more inventory. But I challenge you to consider raising your prices first. A price raise may sound counterintuitive, but rising demand is a clear indication that your customers want what you’re selling and are willing to pay for it. Higher prices may churn some of your lower margin customers, but that is a good thing, because it increases your capacity to serve your more profitable customers who value your services.
Step 6: Premium or low cost? Doesn’t matter, but stay in your lane
If the quality of your services is higher than your competitors (and you can prove it), you can command higher prices. As you move prices up, you will reach a maximum point (the ceiling) beyond which customers no longer see the value and seek more affordable alternatives. If you have premium pricing but your service is mediocre, your customers will leave. If you have below market pricing but your service is premium, your margins will no doubt suffer due to over-delivering. Whatever you do, don’t get stuck in the mushy middle.
Oh, and make sure your team’s capabilities align with your offering. If you have a white glove service, you need to hire A players. If “lowest prices in town” is your pricing strategy, you’ll need to invest heavily in technology and offshoring to bring your costs down.
Step 7: Don’t be greedy. Invest in customer experience
If you have insanely high margins, it’s only a matter of time before competitors see that and force you to lower your prices or lose sales. Invest some of that margin into customer experience or making your service/product even better so clients won’t jump to your less expensive competitors.
Step 8: Don’t try to be all things to all people.
Positioning is the art of sacrifice. Just because your client asked you to do something doesn’t mean you should offer it as a service. Focus on solving one specific problem for your clients better than any of your competitors rather than offering a wide range of mediocre services.
Some final thoughts on pricing.
Understand your pricing vs customer perceived value. Is there a gap? This may be a marketing problem.
If clients are loyal but your margins are soft, then that’s a good sign you have priced yourself too low.
Some clients are simply not a good fit, require too much hand holding, and actually hurt your business, your margins, and your morale. Don’t be afraid to fire a client.
If margins are strong but customers are leaving, you may have a customer service problem or a pricing problem. You may need to invest more of your margin in improving customer service, or lower prices to bring them in line with your service delivery capabilities.
Delivering quality services requires quality people. You need your A team on top of their game solving client problems, closing sales, and driving the business forward.
To lower the average cost of your client-facing team, think about pushing down the work. Hire cheaper labor to deal with the administrative tasks. Make sure your most valuable people are doing the most valuable work.
If you price appropriately you can afford good people. Don’t be tempted to discount your prices at the first sign of a slowdown. You won’t be able to hire good people moving forward, your services will suffer, and you’ll end up chasing business in a downward spiral of lowering prices and margins.
Want some help getting your pricing right?
As a strategic Bay Area accounting firm, we help our clients understand how their business results (month over month) reveal whether or not they are pricing their services appropriately. We can show them how to move the price levers in the right direction to align their pricing with their market position and their service quality relative to the competition.
It’s all in the numbers. And that is how we make sure that your price is right.
Want to talk pricing? Schedule a no-obligation phone call with Ashley here.