How much time do most business owners spend pricing their products? According to a study from Price Intelligently, only about six hours. Total.
That’s less than one work day in the lifetime of your business spent thinking about one of the factors that most directly impacts your company’s revenue: how much you ask for your products or services.
Most business owners have had the idea of “volume, volume, volume” drilled into their brains. So they reach out to new markets, put up more landing pages or buy another list, all of which involves spending more money without a guaranteed return.
Whereas if you take a hard look at your pricing strategy, you’re more likely to see results without having to invest another dollar into new marketing efforts.
Price Intelligently CEO Patrick Campbell has seen even a minor change in pricing strategy boost a business’s profits 11%. He believes that companies need to be much more strategic about their pricing, rather than simply estimating what the market will bear.
Patrick sat down with me to talk about how small and medium-sized businesses can improve their bottom lines with only a little extra work.
Your first question may be, “If pricing is such an important factor, why aren’t most businesses doing this work already?”
Patrick points out that unless you’ve earned an MBA, you’ve probably never been taught much of anything about pricing strategy. You’re left with the default of pricing according to your competition. If your closest competitors are selling a photography course for $97, then you would sell your photography course for $97.
But what if your course is worth twice as much as your competitors’, or only half as much? By valuing your product based solely on your competition, you may be missing out on customers who would gladly pay more for your product—or who won’t consider it at your current price. Instead, Patrick says, you need to realistically consider the value your customers will see in your product.
Here are Patrick’s top three tips on creating value and pricing accordingly:
1. Identify Your Target Market
Most small to medium-sized businesses believe they should behave like big-box companies and appeal to everyone. Unfortunately, this strategy can attract customers who aren’t the right fit. This can result in businesses feeling like they need to discount their prices to get customers through the door.
“Businesses get to a point where it’s a little bit too late and they’ve essentially taken on way too many customers who cost way too much,” says Patrick.
Instead, you should spend some time identifying the customers who are interested in and will benefit the most from, your product or service.
For instance, Price Intelligently very specifically markets to SaaS (software as a service) companies. It’s not that they won’t help other customers, but they realized that SaaS was where they could get the biggest bang for their buck.
So how do you find your target market? Start by figuring out who you’re selling to.
Patrick recommends creating customer personas and sharing them with your entire marketing team. This will help you focus all of your marketing on your particular audience.
A customer persona is a characterization or archetype of your customers. It gives you insight into who your customers are and why they want to buy your product or service. Creating customer personas makes your customers more real to you and lets you get inside their heads when you’re working on your marketing messages.
A basic customer persona consists of:
- Demographics, like age, gender, household income, profession, marital status, family, etc.
- Psychographics, like hobbies, interests, political affiliations, etc.
- Where your persona gets his or her information (news, blogs, social media, etc.)
- Hopes and fears
- Challenges he or she is facing
- Goals and values
- Common objections to your product or service
- What this person would want out of your product or service
Patrick also recommends creating these customer personas based on available data instead of randomly creating the ideal customer. Look at your analytics for information on who is searching for your product. Ask your customers and potential customers questions to get their direct and candid input. All of this data will give you a much better idea of who you’re selling to.
Creating customer personas can also make your marketing far more effective. If you’re trying to target a bunch of different types of customers with the same offer, you’re much less likely to get the conversion rate you’re looking for. When you’ve defined several different customer personas, you can sell the right product to the right customer at the right price, which will improve your bottom line.
2. Examine Your Pricing Model to Find Opportunities for Increasing Lifetime Value per Customer
If you only focus on volume, and your company isn’t prepared for that volume, you may get a lot of sales in the short-term, but you may find that those sales result in long-term losses because you end up bringing the wrong customers in the door, or that these customers only purchase from you once.
Your goal is to increase the amount of money you’re making from your customers over the long term. While this may not be as glamorous, it will keep the engine of your business running more smoothly.
Large companies have the ability to throw money at a problem so they can discount to keep customers coming through their doors. Small to medium-sized businesses need to consider all of their resources and make sure they’re being as efficient as possible with their decisions.
Pricing factors heavily into these decisions.
“With most small to medium-size businesses, you have limited resources.” Patrick says. “You really need to be pushing to improve that lifetime value in a way that you can retain those customers and keep them coming back or keep them paying depending on whether you have a retail product versus something that’s recurring, like a membership or a subscription.”
How can you do that?
3. Increase Your Prices Without a Commensurate Increase in Costs by Building Packages
Many business owners are afraid of increasing their prices. And that’s fair. You don’t want to drive your customers into the arms of your less expensive (but not always better) competitors. But you can increase your price while still keeping your customers. You can add more value.
If you’re selling a physical product, like a stuffed animal, can you add a book to go with it, so you can increase the price but keep your costs down? If you are selling a service, can you offer a package deal that includes certain benefits or extra services instead of just charging an hourly rate?
Find ways to bundle your products or services so they add value, even though the price might be higher than your competitors.
As mentioned earlier, a minor change in pricing can result in an 11% increase in your profits. So it is definitely worth taking the time to sit down and review your current pricing strategy to see whether what you’re doing now is helping or harming your business.
How Much Time Have You Spent on Pricing?
Have you taken a serious look at the pricing structure for your business lately? Are you going to now? Tell us about your plans in the comments section below.