Many small business owners consider pricing some kind of dark voodoo that you can only get right with the appropriate incantations, or access to a pricing consultant who knows the right incantations. At risk of hurting my own business, I’m going to tell you that pricing doesn’t have to be so hard. In fact, customers will help you optimize prices, if you let them.
First, we have to get rid of some assumptions. Pricing is not a number that you chisel in stone after you have developed your product, marketing, and sales. Pricing is a process that evolves over time, in concert with your product, the other “P’s” of marketing, and your market. Next, price is a function of your offering’s perceived differential value. So understanding how customers perceive the value they receive relative to alternatives is essential for good pricing. Of course, most companies go to market without a clearly thought-out pricing story.
So now you’re out in the market with your price. Prospective customers– those who might actually want the offering, not just the people in the surrounding parts of the market that you included in your optimistic scenario– can have 3 responses to your price. Note, we are assuming you have already filtered those who don’t really want the product.
First, they can say, “OK, I’ll buy.” This is generally a good thing. Although if they never say anything about your prices, chances are you’re leaving money on the table.
Or, they might say “sounds good, but it’s out of my budget.” Most savvy buyers know that they should say this, even if they are willing to pay the price. Many vendors immediately start discounting. Sometimes, a buyer doesn’t even have to express a problem with the price and the vendor will sound defensive and proactively cut prices. So first, you have to understand if price is the real issue, if the buyer is just asking for a discount, or if the price objection is a smoke screen for other issues. To rule out the last scenario, you can ask them “if we gave you the price you want, would you buy today?” If they say “yes” then you can go on to dealing with the pricing issue. If they start talking about other problems, then you know you have to deal with those issues. Cutting price will just hurt your margin without getting you anywhere.
If it is a price objection, you will of course have your value message ready, right? If the buyer has faith in the value message, you may be all set. If they object to the value message, they may not really be in your target market, or they may just not care about some part of the value. So instead of just lowering the price, you need to take that value away. Then the prospect may be ready to buy, or, they may come back and say “wait, actually, I want that premium service plan.” If enough folks don’t see value in the service plan, though, they are helping you develop your lower cost offering.
Some other prospects may say “sounds good, but what I really need is [some other high end feature/benefit that you don’t provide].” Now you can ask what that would mean, how they would use it, what they would be willing to pay to get it, and so on. The customer is helping you develop a higher end offering.
Objections to your price and product are not necessarily bad. They’re valuable feedback that you can use to refine your offerings and your pricing. Pricing does not have to involve a PhD in statistics or a (very expensive) pricing consultant. Your customers and prospects will do a lot of the work for you.