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Three Simple Pricing Rules for any SME

One of the biggest myths in pricing is that “its all about the dollars and cents”, the figures that go on the price tag we attach to our product or service. Pricing is so much more than that: most of the 80 or so public or in-house pricing workshops that I’ve facilitated over the years run for 2 or 3 days.

So as you can imagine, it’s a pretty formidable task to find 350 – 500 words of universal pricing advice that any SME can embrace. But these three rules should fit the bill…

Rule Number One: All Value is Subjective

Ask one person why they have private health insurance and she might tell you “…for piece of mind”. Another might tell you “…to get out of the public health system”, and a third might say something like “…to get back to work or home quicker”.

These different responses illustrate that all value is subjective. Yes, you can talk to those people about features and benefits, but ultimately, value is in the eyes of the customer. So what are the implications of this for your pricing strategy?

Firstly, value is what your customers are buying. They don’t care about your costs. So the best way to increase prices is to increase value (and vice versa for decreasing prices). It is not by trying to defend your price increase on the basis of the latest inflation figures.

Secondly, because value differs, between customers, so can (and should) your pricing. While one-on-one pricing may be “marketing nirvana”, at a minimum there will be groupings of customers who see similar or identical sources of value in your product. They are called “customer segments”, and rather than just giving them a warm and fuzzy name, develop actionable strategies towards these segments, whether it be targeted marketing activity or segment-specific pricing.

Rule Number Two: All Pricing is Contextual

If you’re feeling downhearted after reading Rule #1, and learning you’re not in control of this concept of “value”, the good news is that Rule #2 provides a solution, or at least some very good assistance.

You can shape customer perceptions of value by adjusting the context in which your pricing occurs or appears. Let’s look at some specific examples of this, which may be easily applied to your pricing strategy.

Why do customers pay more for an ice cold beer purchased from a five star hotel at one end of a beach, and less when the identical beer is purchased from a run down grocery store at the other end of the beach? Because the context in which the price is paid is different. Sure, the hotel can compete on price with the grocery store. But they will be leaving money on the table, and if you can win a customer on price, you can also loose a customer on price.

The $800 bottle of wine on a restaurant wine list also provides context: it’s there to make the $80 bottle of wine look like really good value for money, and the one the restaurant really wants you to buy.

Rule Number Three: Always Offer Three Choices

My final piece of advice to SMEs is also universally applicable. Always try to offer your customers three choices, the technical pricing term for which is “goldilocks pricing”.

Give the customer one choice, and you’ve got a 50:50 chance of winning the business. Give them two choices, and you are forcing them to make a price-based decision. But give a customer three choices, then firstly, the question they ask themselves is “which one do I buy?”, not “should I buy from this vendor?” and secondly, you are forcing them to make a value-based decision (not a price-based one).

Many SME’s are reluctant to exploit pricing to its full potential. But it is the most powerful profit improvement lever any company has, regardless of their size.

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