You’re working incredibly hard; you have many clients coming through the door, and yet you’re still not making much money. If this sounds like a familiar scenario, your business could very well have a pricing problem.
Pricing can be an agonising task for any business owner, whether you’re just starting out or you are finally shaking up your pricing structure after a long time at a certain rate.
Wherever you are on your pricing journey, here are four common pitfalls that many businesses fall into and how to successfully overcome them.
Don’t set your prices based on what your competitors are charging
Comparison is an inevitable part of human nature and one that businesses can’t seem to avoid. For example, in the Pilates sector, it’s common for studios to stick to a specific pricing structure simply because the local competition is charging a similar amount. Don’t do this!
Firstly, especially if you are new to the area, you may find that your competitors are undercharging, or even in a situation where their business is on the rocks. Even more reason for you not to compare your pricing structure to theirs; you never really know the full story.
Secondly, if you can’t charge more for your product than your competitors charge, you are undifferentiated – you are selling a commodity like gravel, wheat, or electricity. The more differentiated you are, the stronger your unique selling point will be, and the more you can charge.
While it may be tempting to undercut your competition in an attempt to attract more customers, in most cases, this isn’t the right move. In service-based businesses especially, customers are paying for an experience and have a certain level of expectation based on your price. If you price yourself substantially lower than the competition, it’s easy for customers to assume that your offering is substantially lower in quality too.
On the other hand, if you attempt to price yourself far above the local competition, you’d better ensure that your value, quality and level of service is far and above anything they can offer. If not, you could risk losing those customers entirely.
So, how can you differentiate yourself and charge more?
The answer to this question is not what you think. It is not simply a case of offering better quality products or more caring customer service. These factors should be considered as entry fees to owning your own business, not differentiators.
Instead, turn your attention to the additional items that you package around your core product or service. For example, airline tickets:
To travel from LA to Chicago, you can pay either $220 or $2,200, but both tickets are on the same aircraft. Both tickets depart and arrive at the same time and have the same levels of safety and reliability, so what makes one of those fares worth ten times more to one person than another?
Ultimately, it is the things that you package around your core product – comfier seats, better food, access to the first-class lounge, increased luggage allowance or a glass of champagne on arrival – that will determine the value that customers place on your product and consequently how much they will pay.
There are many ‘package’ items that you can build into your business, none of which have much to do with your core service, in this case, the flight from LA to Chicago.
Discovering what your clients truly value
Value is a very subjective thing, and the perception of value will vary from customer to customer. One person might value a more expensive product or service, while others might value a great deal or an unexpected free upgrade. Some customers simply have more money than time and will prioritise any deal which can land them a few more precious minutes – priority boarding, self-check-in and standby service, for example.
The airline industry also provides the perfect example of how tiered pricing structures can work in practice. Airlines have figured out how to charge dramatically different prices for what is essentially the same service – getting customers from A to B – by working out what their customers truly value and adding it in.
Cheap is not always cheerful
Despite this, some businesses continue to believe that their customers only ever want the cheapest option and design their pricing structure accordingly. These businesses miss a whole subsection of clients and customers who are willing and able to pay more for a better experience.
If you’re getting the sense that you need to put your prices up, sit down and have an open, honest conversation with your best clients – those who spend a lot and refer you to new customers. You will learn very quickly what is valuable to them, what they expect to see more of from your business, and you may even be surprised at how many of them say, “I was wondering when you were going to say this!”.
Having these open conversations and seeking customer feedback will give you insight into your business from the customer’s point of view. For example, are there complaints about how inflexible your returns policy is? Are they unable to see their favourite instructor as he is waitlisted? Or is your product too hard to assemble on arrival?
These are all opportunities for you, as the business owner, to add value and to charge more for it. To be clear, I am not advocating that you sell higher-priced, higher-value products to all your clients – that would defeat the point. If everyone has priority check-in, then no one has priority check-in. But changes like this can be made for a select few of your customers.
Be flexible but not spoilt for choice
For businesses that offer services or prescriptions, considering multiple price points – I recommend three – is a way of getting around this problem. Ensure that what you are offering caters for everything, from smaller budgets to premium offerings, and make specific names for them that do not scream “cheap to expensive”.
This allows your new and existing customers to make informed decisions on the commitment they are willing to make to your business, as well as options to flex this commitment up or down, depending on their circumstances.
Customers like options, but not so many that they feel overwhelmed. Consider the restaurant with 200 seemingly endless menu items. Do you feel excited or overwhelmed? In most cases, it’s probably the latter, and you end up ordering something you are not satisfied with.
So, what is the right way to go? In many cases, three is the magic number. Think about the movie theatre with its large, medium, and small popcorn. A Pilates studio might offer a standard rate, along with an off-peak rate and a higher tier with the option to choose a smaller, more intimate class. By reducing the number of choices but still giving your customers the illusion of choice, you’ll be setting yourself up for success.
Ultimately, the best way to fix your business’s pricing problem is to find a solution that works for both you and your clients. Do your research to determine what your customers consider as value, look for ways to ‘package’ your core offering and demonstrate that you can be flexible when you need to be.
Demonstrating that you can be flexible will also further strengthen your customer relationships, which will translate to a longer commitment from that customer.
Remember also that what you decide to set now is not forever, and you can adjust your model over time and in relation to the feedback you receive from your audience.