The most experienced entrepreneurs know that price is the dominant factor for driving profit. While profits can be increased via a number of ways, raising prices is the simplest method that yields the biggest result. A mere 1 percent change in price can generate a double-digit change in net profit percentages.
If pricing is so important, certainly it’d make sense for entrepreneurs to put some serious effort into it, right? Unfortunately, most entrepreneurs skimp out on this opportunity and simply look around to see what everyone else is charging, setting their own prices to fit within reasons of the norm. Big mistake.
So, how should we go about pricing then? Here are three questions to help you get on the right path:
What problem are you solving?
Value, like beauty, is in the eye of the beholder. When most entrepreneurs are busy figuring out their costs and trying to guess what they should charge, the right thing to do would be to go to the source and understand the value you are creating. Remember, everyone only cares about themselves, and your customers don’t care about your costs and hours spent on the solution. They care about the problem you are solving for them.
Who are your customers?
A continuation of “What problem are you solving?” would be “Who are you solving the problem for?”
The person that you are solving the problem for, how much value they place on this problem going away, as well as how much money they can actually afford will determine what price you can set. While many entrepreneurs would like to think their products or services are worth $XX and that they are in a vacuumed market of their own, they are wrong. You cannot charge more than the market will bear, and that is just one of the few rules everyone has to abide by.
While a small island in the Pacific might be on sale for the low price of $80 million this holiday season, I am not the right buyer for it, no matter how it’s priced. I am the wrong audience because I just can’t afford it, even if I really wanted the island.
What do you stand for?
While we would like to think that our frontal lobe makes us adults who are capable of rational decisions, we are not. If anything, scientists have proven that we are predictably irrational when it comes to most things in life. People are driven by emotions, so it is important that your brand speaks to them as such, and there is real value here that people would pay extra for.
If you think your product or service is a commodity for which branding and emotions don’t apply, take a walk down the water aisle next time you are at your supermarket. There, you will find one of the best examples of branding’s effect on price. Products such as reusable grocery bags and recycled tableware are other examples that appeal to the consumer’s desire to be environmentally friendly.
Does your product and/or brand offer similar emotional value? If not, it might be worth looking into and should be applied to your messaging. It’ll certainly increase your value to your customers and, who knows, you might be able to charge more for it.
So, there are the three questions to ask to help you set the perfect price for the value that you are creating for your customers. With these concepts in mind, moving your revenue by just 1 percent doesn’t seem to be all that difficult, right? Remember, even 1 percent can yield a big impact.
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