In the myth of Icarus, his father makes him wings to escape from an island.*
His father warns Icarus not to fly too high, or the sun will melt the wax holding them together, or to fly too low, since the dampness from the water will ruin the feathers. Fatefully, Icarus does not heed this advice.
“Never regret thy fall, O Icarus of the fearless flight,
For the greatest tragedy of all, Is never to feel the burning light.”
– attributed to Oscar Wilde
In the reality of sales, the expression may sound like, “Price too high and customers won’t buy, but price too low and the business won’t grow.”
How do you keep from falling to the ground? Here are some pricing tips to consider:
Costs: Calculate the COGS and all indirect expenses, such as salaries, R&D, overhead, and debt servicing, into your business costs. Use these costs to set pricing minimums.
Margins: These may be dictated by the industry, but you also may want to be flexible here as growth opportunities may prompt flexibility. While growth and profitability are not necessarily opposed, there are often different approaches to reach them. You must decide your desired preference and a clear strategy to achieve that goal.
Competition: While I’m not a fan of fully following others, you need a sense of how your competitors are positioned and priced. If you charge more, that’s only fine if you can justify the value received by customers.
Value Proposition: Understand how you will help customers facilitate their work, grow their business, and frame pricing in terms of the benefit they will receive. You may be tempted to anchor your prices to your costs, margins, and competition. Avoid that temptation by recognizing and announcing the specific value you provide to your customers. There’s a good chance you need to charge more! If you save the customer a lot of money or grow their earnings, your price is a small fraction of their gain.
Odd Numbers: Recognize that while $9.99 is essentially $10, research supports pricing just a little lower. Note: According to one study, when the price of margarine at a local grocery chain fell from 71 cents to 69 cents, sales jumped by an astounding 222%!** Two pennies can be worth a lot.
Choice: Give the illusion of selection. By setting one option incredibly high, it makes the others look reasonable. If you offer three prices: $10, $20, and $30, the customer may willingly pay $20 to get the value and worth they perceived that they deserve. If the options change to $15, $30, and $75, then $30 may still seem like the right value, and since the price is so much less than $75, it looks like a fair price, too. Another way to offer choice is by including a mixture of products, features, and services.
Tiers: Offer tiers of prices to incrementally add value and provide another level of choice. Price-sensitive clients may desire the basic tier, and that’s fine since you can manage it with minimal adjustments or strategy. The premium tier may appeal to customers who stand to benefit more or to consumers enamored by status. Either way, you’re also giving them exactly what they want by appealing to a variety of factors. Tiers also allow you to experiment occasionally with different offerings and price tags.
Boundaries: Establish clear boundaries to avoid scope creep. Ironically, smaller clients often push the limits more than the well-paying larger clients. Be clear with any client about their expectations and decide where you will take a firm stand and where you will be flexible. If you allow for anything outside the original scope, be sure to list that in writing and the next invoice, even if the cost is credited out. You’ll thank me when it comes time to renegotiate any contract.
Recurring Revenues: When it comes to cash flow, growing a business, and potential exits, recurring revenues far outweigh other metrics. When revenues will be earned consistently and expectedly, that gives you more certainty with planning.
Many businesses mistakenly believe that price alone drives sales. The ability to market, sell, and support clients largely drives sales. However, getting pricing right is critical to success. If you overprice, then you may lose many potential opportunities. If you underprice, the business will fail to sustain operations.
Key Takeaway: Once you apply best methods to determine the best pricing, demonstrate your value to prospective customers. Avoid the fate of Icarus and soar at the perfect height.
Photo by Fabio Brocceri who can be found here: https://www.facebook.com/fabiobrocceri.it
* In Greek mythology, Icarus and Daedalus attempt to escape from Crete using wings Daedalus constructed from feathers and wax. Daedalus warns Icarus to not fly too low, lest the sea's dampness clog his wings, nor too high, lest the sun's heat melt the wax. But Icarus flies too close to the sun and tumbles from the sky. https://en.wikipedia.org/wiki/Icarus
** The Psychology Behind the Sweet Spots of Pricing by Martin Lindstrom can be found here: https://bit.ly/2OGoAcs
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