Pricing is a marketing strategy.

June 15, 2009 ·  

Too often in business, particularly service businesses, pricing is not seen as an important business tool to develop the business.  Pricing is often seen as something that is set by the market. From accountants, engineers, financial planners to physiotherapists often the answer to the question of how you set your prices is usually one of two answers.  The first option is have a look around at what everybody is charging.  The second option is, work out my costs and add a margin that I want to achieve as profit.  These two approaches are not a  determined appropriate pricing strategy to ensure that the price being charged for the service is in any way reflective of the value being delivered.  Unfortunately too many businesses do not look at price as an important element of their marketing strategy

So what do customers buy?  We are all familiar with the old, they don’t buy the drill bit they buy the hole, they don’t buy the sausage they buy the sizzle.  Theodore Levitt of Harvard Business School put it best when he said that customers buy expectations.  They expect a certain result, a certain outcome, a certain problem be solved, pleasure to obtain or pain avoided and that is what they are buying.  They are not buying time, they are not buying effort, they are not buying the cost structure of the business - they are buying an expectation, an expectation of a result.  Being mindful of this fact, why on earth would any business therefore price its services on a time basis or some other anachronistic tool that is not focused on the value being delivered to the customer?

We need to ensure that as a business that we are meeting our customers expectations because that is what they are buying, that is what they are going to pay for.

In the United States it has become known amongst management literature an effect called the “Starbucks effect”.  Approximately 12 to 13 years ago, 3% of coffee sold in the United States was premium.  Today, more than 40% of coffee sold in the United States is premium.  This is primarily due to the development of Starbucks.  They selected a customer base, delivered an experience that that customer base wanted.

Who would have ever thought that we would be paying the money that we are for bottled water.  Something that we can get for free, it is not scarce in reality There is a plentiful supply of drinking water in the western world yet we are buying bottled water.  To make this even more of interest is to have a look at the company Evian who sell premium bottled water.  They make an experience out of bottled water.  Maybe it is not coincidental that Evian is naïve spelt backwards.

Evian, Starbucks - they have loyal delighted customers.  This wasn’t done by charging a fair price or catering to discount shoppers.  It was done by delivering an experience to a particular customer base that wants that experience and charging appropriate for it.

Pricing can assist in the development of a business in so many ways as it transmits so much information.  Take a minute and look at the lead pencil that you may have on your desk.  Think of all the businesses that have been involved in putting that pencil together from the tree - the logger, all the way through to the end salesman from which you purchased that pencil from.  Every which point, a price was charged.  A price that was transmitted value to the next stage.  Even in the humble pencil, the price mechanism is at work.

So the question is - how is the price mechanism at work in your business and is it being looked at properly.

The first point in determining what is the price is to look at the value side.  Customers are only going to deal with your business if they see some value from doing so.

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