This week I’ve noticed quite a few posts which have promoted discounts for products or services. So, with an ‘end of summer vibe’, it’s a good time to focus in depth on the fundamental topic of pricing.
How to calculate your price?
There are two distinct routes which you can follow when setting your price:
1. Cost-based pricing, where as the supplier you can calculate the exact cost of production or provision of your service and charge accordingly
2. Value-based pricing, in which the perspective changes from supplier to customer. What is your product/service worth to your potential customers? You can consider a couple of examples to make this clear. Take the example of an umbrella during an intense downpour. You might be prepared to pay more than usual for an umbrella to keep you dry. Or in an airport, if you have to unexpectedly repack your bags to meet weight restrictions, you might consider buying a bag of lower quality than the rest of your luggage set, provided it delivers the functionality which you need.
My own business is an example of this where I have chosen to follow the route of cost leadership to differentiate myself from my competitors. I deliberately keep my costs and prices as low as possible. I aim to demonstrate, by example, how it is possible to develop a business without incurring high costs, and that it is possible to command respect without charging high prices. What does your price say about you? Please bear in mind that price is an enormously significant factor when positioning your product and reaching specific segments. This can be illuminated by everyday examples which we take for granted in a developed commercial environment: budget airlines and value ranges of grocery products are choices which are set alongside premium options. The savvy customer knows the deal; there are implicit benefits relating to quality which are directly linked to the price paid. The customer can experience a glow of self-validation when he or she chooses a premium priced product, which is akin to thinking “Look, I must be a superior customer because I choose to buy premium.” I am committed to my low-cost price strategy because it is consistent with my brand’s vision of being accessible and affordable for small businesses and sole traders. If I choose to forego my profit for the time being, it is because I am moving towards a larger vision by taking small steps with judgement. This leads us into the next topic.
When is it right to discount and give- away for free?
This post is illustrated by strawberries, because I consider fruit to be an excellent example in nature of a free gift which is shared by the plant with the intention of spreading its seed. Free is fine; perhaps you choose to give a trial offer, raffle prize, or a charity donation. All of these are examples of times when you might be able to fulfil a wider purpose with your business, beyond generating a sale. The times which are best suited to discounts and free give-aways are:
• When you have excess stock: farmers may be faced with a glut of vegetables at certain times of the year. Consider the over-supply of sprouts just after Christmas. If you find that you have a surplus amount of stock, such as un-booked appointments for service providers, turn it into an opportunity by inviting carefully selected clients to fill the gaps for free.
• When you’re introducing something new/testing the market and looking for feedback. The transaction with your potential customer might not involve traditional payment, but feedback on your prototype is of significant value to you at an early stage of development.
• To aggressively challenge a competitor in your market. If you are keen to steal market share from a competitor, it would be appropriate to sell your product at a discount so that it is sold at a lower price than theirs. If the products are truly like-for-like, it is reasonable to assume that buyers will favour the cheaper option. But, beware: once the price has been lowered, it is difficult to increase it again. The lower price is likely to become normalised in the mind of the customer.
• If you are keen to shift the pattern of purchasing in your market: my years of experience analysing sales patterns of grocery products has taught me that discounts rarely increase the overall quantity of sales. Instead, they bring forward purchases which would have been made anyway (at full price). If a buyer really wants to purchase your product, they will buy it at its normal price at the time it’s required, but give them the chance to stock up cheaply in advance, and they will. That’s why it is fairly rare to see substantial price offers on products like jars of coffee. With careful implementation, it is possible to alter the purchase cycle for your product by using discounts to shift the purchase pattern in your market.
• When you are advertising heavily, research shows that the alignment of advertising activity with simultaneous price-promotion delivers improved return on the advertising investment. This outcome occurs because the stimuli converge and augment the behavioural change amongst the customers.
• To reward your customers, it can be a good idea to offer your current customers a discount against future bookings in return for their referral of a new customer to you. In this way, you are encouraging your customers to be your advocates, thereby recruiting them to do some marketing on your behalf.
Thank you for reading this blogpost. If you would like to discuss your pricing policy with me please consider booking an appointment with me at the September marketing clinic or email for free: [email protected]