Pricing - what should you charge

As we reach the end of another financial year alot of businesses will be sitting down to evaluate their place in the market. One of the first things that always comes under the microscope is the pricing of both products and services. It's always something that is worth evaluating, and both an increase or a decrease in your pricing can have positive or negative effects on your overall bottom line. Here at 543 we certainly aren't experts in economics by any stretch of the imagination, but we do have the privilege of helping companies of all types get their businesses online. We've also spent a whole lot of time researching pricing and below are a few of the underlying factors we've seen recommended time and again.

Don't do something for nothing
This might seem obvious, but one of the big pitfalls that small businesses in particular fall into is pricing their products and services at cost. The logic is pretty obvious "if this costs X, then it shouldn't be sold much more than X." It's a really admirable way to do business, but it's also not sustainable. If you want to be fair to your customers and provide them with a great service LONG TERM, then you need to make sure that your company also makes enough margin to last a long time as well. For example, no one wants us to build them a website and not be around a year later to be able to manage it. To be the 'good guy' with great prices and longevity, you'll need to make money somewhere along the line.

Research, research, and a little bit more research
The beauty of an open market is that there are bound to be a number of competitors in whatever your field is, and there are likely to be some competitors near you. If your 'costs' are the absolute baseline for what you can sell, your competitors can be an easy barometer of where you can price products or services including profit/margin. Really look around hard and identify what competitors price themselves at and figure out where you want to fit in the price scale compared to them.

Who is your customer and what will they pay
Trying to understand what your customer might be willing to pay for your product or service is a really tricky proposition. For small businesses in particular, your gut instinct is probably to value your services less than what a consumer will actually pay for them. That's where your competitor research comes in handy - if you can identify a successful competitor with a similar product, then you know that you can match them and also have sales. Of course, you may also want to grab a different part of the market to your competition. If so, it may be worth canvasing that market to understand what their pricing perception is. 

Pricing for perception
As counter intuitive as it may seem, a lower price point can potentially lead to less sales - depending on the product and the target market. A lower price can lead consumers to a belief that the product or service is going to be 'less' than something that is priced higher. For something like web design, this is definitely a phenomena we come across regularly. Our website prices tend to be on the lower end of the scale, and that comes with a risk that they are perceived as 'cheap'. Regardless of how high the quality of our work is, the pricing can still give the impression that if a customer uses us, they will not be getting a 'premium' product. That obviously isn't correct, and so our sales pitch needs to counter that perception.

Be smart with your pricing structure
A big pitfall of pricing a product or service can be that businesses get a little bit one dimensional in their thinking. Some industries will jump straight to their normal way of doing things, when there might be another way to look at pricing the same product or service that could generate more sales and increase revenue. Law firms, for example, will religiously price by an hourly rate, rather than going to a project based approach. That's just an example of course, but every business should at least go through the thought process of whether the way they are pricing could be done differently. Should you have multiple levels of products or services? Should you bundle groups of products or services? Should you offer discounts? Can you run a recurring revenue system instead of a one off fee approach? You might end up back where you started - but at the very least going through this thought process should get you closest to the pricing scenario that works best for you.

Behind the curtain - 543's practical example
As always, we like to be pretty transparent in what we do, so we thought we'd delve into how we've reached our pricing structures and the thought processes we went through. These will be different for everyone, but hopefully they at least give a real world example when setting your own pricing:

• Cost - starting at the start, we had a good understanding of what our actual 'money spent' costs were. For us, that's everything from advertising, to office equipment and all the software we need to build a website. What we realised was because of our processes and some smart decisions we've made in terms of website platforms we use, we sit at the lower end of the costs scale - so pricing largely was dictated by 'our time'.
• Research - straight away we realised that there is a HUGE range of pricing when it comes to website design. Going like for like, we identified that we could be about a third to a half the price of our competition and wanted to be in that 'affordable' place in the market.
• Our customer - initially we had a clear customer in mind - the small to medium sized New Zealand business. We knew alot of these companies (especially startups) didn't have huge amounts of funds available to invest in a website, so we wanted to offer a service that could cater to them. As time went on, we've had a pretty constant level of 'surprise' at our low pricing though, so we've come to understand that those businesses are still willing to invest a little bit more for a high quality site.
• The perception - as mentioned, when we first hit the market, our pricing was seen as so low that the product was perceived as being 'cheap'. That's something we wanted to avoid, and (along with our costs increasing as we grew), we eventually raised our prices slightly to counter that. In doing so, we still stuck to the thought process above (being the 'affordable' option), but we wanted perception and our pricing to match our higher quality product more.
• Pricing structure - this was something we um'd and ah'd over for a while. We contemplated charging a client more and spreading that increased fee over monthly payments for a year or two. We also looked at bundling up some of our other services with a website design package. In the end we figured that alot of our client's wanted choice, and so our focus was allowing flexibility in letting them choose what they wanted. Initial cash flow was also really important, and we didn't want to get bogged down doing alot of work now, that the client was only paying for in a year or two. It's still something we constantly consider, and we definitely think it's a valuable exercise for any business.

It's important to realise that each business will have a slightly different approach to setting their pricing. Some of our competitors (who we have immense respect for and will sometimes even refer clients to) are in a completely different price bracket to us because of things like cost structures and the segment of the market they want to be working with. We all have slightly different approaches to business and those different approaches can work for different companies. The important takeaway should be that it's always worth having a look at what you and your competitors are doing with pricing - and it's always OK to have an experiment and make a change.