Because, with apologies to Brucie, the price often isn’t right!

As business owners we struggle with pricing.  We worry that we are not charging the ‘right’ price, that if we charge too much we lose sales and charge too little then profits suffer.  So how do we find that magic number?  In our case ignorance is not bliss and a little certainty or insight would go an awful long way!

But is it as difficult as we sometimes think it is?  There is the true story of a restaurant that asked its customers to pay what they thought the meal was worth instead of putting prices on the menu.  The owner found that diners were paying 5% to 10% more than they would do with a menu containing prices.  Satisfied customers and a happy owner!

Great story, and the relevance is?

We can learn a couple of things from this, the first is that people don’t necessarily value something the same as we do or, more importantly, the way we think they will.  The second is that people will pay different amounts for the same product or service.

While we may not want to take the risk that the restauranteur did we can still apply those lessons to our businesses:

  • If we can work out how our customers think and what price they would pay for what we sell to them then we can be confident that we are pricing at the maximum level and not leaving potential sales unbilled

 

  • We can differentiate between our customers and charge them the price that each is prepared to pay.  And we can wave goodbye to those who aren’t prepared to pay enough - they will only whinge, grumble & take forever to pay and are those the customers you really want?

Fine in theory, how does it work in practice?

Take an architect for example.  He is asked by a client to design an extension to his house, he quotes the client a price (based on the time he thinks it will take to do the work), does the work, the client is happy with his drawings and pays the bill when sent.  A few months later that client’s next door neighbour turns up and tells the architect that he did such a good job that he would like the same kind of extension (with a couple of small modifications) designed for him and asks how much it will cost.

Does the architect quote him for a couple of hours work as he already has the drawings and only needs to tweak them or does he charge the same amount as for his neighbour (significantly more)?  The second client is happy whichever bill he receives so what should the architect do?!

The retail sector is more difficult as our prices are usually on display!  But it is not impossible to apply differential pricing.  To use a somewhat hackneyed illustration, a corner shop has two young customers who come into the shop regularly to spend some of their pocket money on sweets.  Wayne gets £5 a week pocket money and Jimmy £2 and they both want to buy packs of Haribo Gummy Bears which are on sale at £2.20.  Wayne buys a pack for £2.20 and disappears off to scoff the lot but Jimmy looks miserably at the shopkeeper as he can’t afford the same pack.

Does the shopkeeper turn him away or come up with a ‘special’ deal whereby, if Jimmy buys at least two packs a month (and doesn’t breathe a word to Wayne) then he can have them at £2?  Ignoring the dental and sugar rights and wrongs of encouraging children to spend their money on and consume large quantities of sweets even in this situation some form of simple price discrimination can be used.

But, you don’t understand!

Because, you cry, my business is different!  Which is quite right – every business is different and this is what gives you the opportunity to differentiate your business from your competitors, both in terms of price (and not necessarily lower!) but also in terms of what you offer and how you deliver it.  Very few businesses, and particularly those that are consumer facing, don’t have the opportunity to use some form of differential pricing.

 

The first McKellens Masterclass will be looking at exactly these issues, how you go about discovering your customers’ ideal price and how to differentiate on the prices that you charge.