Most times people set prices as a function of three things:

  • What their costs are,
  • What margin the budget demands,
  • What the competition is charging.

All are the wrong way to go about it.

Prices should be absolutely dependent on what customers are willing to pay.

This bears no relationship whatsoever to your costs, or what the boss wants by way of margin, but has a lot to do with what the competitors are charging, assuming your product is substitutable.

The challenge therefore is to ensure that there are no substitutes for your product.

In many categories, perhaps most, this is a real challenge, one that makes marketing all that much more important, as marketing should be focussed on the delivery of value.

Most businesses set out to deliver all the bells and whistles, and the reasoning is that they are trying to help customers by giving them as much as possible, and some choice. However, looking at a product feature by feature and figuring out which ones customers are willing to  pay for, and which are just in the way, makes more sense.

The better you know your customers, it follows, the better you will be able to determine which features they are prepared to pay for, and how much they are worth to them. It also follows that the more specific the niche you are in, the easier it becomes to understand their purchase motivations. Nobody can be all things to all people, choices simply have to be made.

There is an electrician in my local area with a strong proposition.

In an environment where we do not expect tradies to come on time, and when they do turn up, they tramp through your home, and leave a mess behind them. This bloke makes several promises:

He will be there at the nominated time, + or – 15 minutes, or you do not pay him,

He leaves the work area at least as clean as he found it, or you do not pay him.

He will give you the price before he starts the job, and it is a fixed price, it will not change.

He charges a premium rate, and the biggest problem for a potential customer is the waiting list. If you cannot wait, or do not like the hourly rate, he does have the numbers of others he will give you, without any guarantee of performance.

Many people in the area would not use him, as he ‘charges too much’. They are the ones who see little value in the propositions that make him different, and he is fine with that. In fact, he seems to enjoy directing potential customers elsewhere, as it highlights the fact that he is really busy, and has become a price setter, not a price taker.

Back to the challenge of price setting.

When the cost of provision of something that adds value is less than the value customers see, then it makes sense to provide it. In my electricians case, he leaves himself some spare time to ensure he can make good on his promises, and he charges for the privilege, simply because the certainty offers great value to his client base.

Simplicity is a key, the simpler the better.

Simple to explain, deliver and understand.