Pricing your product or service is usually a sticky point for your business and one of the hardest things a business owner needs to figure out. Price your product or service too high and no one will buy or price it too low and you can’t make any money. However, I think where most businesses fail on determining a price is that they end up pricing the wrong thing. Instead of pricing your product or service, your business should price the value the product or service brings in the hands of the purchaser.
The idea of pricing your value rather than your product or service may seem foreign at first, but in reality, your buyers are starting to determine that and are making that decision in their buying decisions. For example take pizza. Little Caesars charges $5 for their large cheese pizza while my local pizza shop charges $15. Ultimately, in each scenario I am buying dough, sauce, and cheese, so why the variant in pricing? What is the value proposition being made by each pizza seller? Little Caesars charges $5 because its selling low quality pizza that is ready when I walk in the store. So if I get a hankering for pizza, I can get it now if I go to Little Caesars, while I would have to call ahead to the local pizza shop and wait a period of time before the pizza is ready. Little Caeasar’s made the strategic decision that the quality of pizza was not up to the same grade as the national chains, so instead of improving the quality of the pizza, they made the decision that it was better to be the low cost provider and get you pizza now. My local shop charges $15 but they are pricing that way because they are selling higher quality pizza. They have a big window in their kitchen where you can see them make the dough, roll it out and make your pizza. Their pricing is saying to consumers, we have better higher quality pizza and if you want that type of quality, you need to pay more for that.
So is your pricing communicating your value? If you default to being the low cost provider in your market, are you telling your customers that your products or services are low quality? Or are you providing high quality services but undercharging for them? If my local pizza shop started charging $5 for their pizza, they would be telling me via their price that their quality has been lowered to that of Little Caesars. That would in turn change my buying decisions in the future if I wanted to have a high quality pizza, by causing me to look elsewhere for someone selling a high quality pizza. Likewise if Little Caesars raised their price to $15, it would signal that their quality has improved, however, if it turns out that quality has not changed, then I would no longer purchase pizzas from Little Caesars as their price does reflect the value I receive.
While many things can go into determine a price for your product or service, it is important to understand that your price communicates your value to your customers. If the value that your price is communicating is incongruent with the thing you are selling, then your buyers will look elsewhere. If your price is inline with the value you are selling, your are more likely to sell to your prospective buyers.