How much does price matter to your business? How often do you review your pricing strategies to achieve the optimum relationship between volume and margin? David Mansfield, visiting professor at Cass Business School has some answers.
Management of manufactured products will apply the ‘cost plus’ method to generate a margin and test it against competing brands. Retailers, whether high street or online, compete ferociously on price and try to maintain their margins by passing on price cuts to their suppliers. These tend to get passed back up the supply chain, often resulting in losses for some. Farmers are the oft quoted victims of grocery wars.
Retailers understand pricing psychology better than most. They have the ability to test strategies and develop sophisticated approaches, to determine what to charge. They often promote their pricing position, making it central to their marketing to bang the message home. From ‘Every Little Helps’ to the annoyingly clunky ‘Never Knowingly Undersold’. Incidentally, I think it’s time John Lewis changed that as I’m pretty sure it’s lost on a lot of people.
I spend much of my time in professional services where there exists a much more random approach to charging customers. At least that’s how it appears. In many sectors there are huge variances in price and I have come to the conclusion that there are lessons to be learnt from the retail sector.
Many continue to price their services in the way they always have, which for some is a very long time. Accountants and lawyers are generally guilty of this approach and will, over time, lose out to new entrants offering a transparent pricing model. It’s already beginning to happen with new fintech services springing up. Fixed rate accounting services are making bold moves into the hourly pricing model employed by traditional firms. Customers are becoming less tolerant of not really knowing a price until the invoice arrives.
I’ve seen several examples of this lately. In one the law firm were less than clear what they were going to be charging. They consequently presented a bill that the client was extremely unhappy about and refused to pay. There was an assumption that the customer was aware that as the work was taking longer a larger bill would arrive. The client believed the longer period was their fault not his and believed he’d agreed a fixed price. He paid a reduced amount and swapped law firms.
Someone once said “A million dollars is the most negotiable number in the world”. Whoever they were, they were right. Round numbers never look considered, even in the world of professional services. Yet companies continue to employ their use, oblivious to how much business it might be costing. I’ve seen clients push back on paying a quoted £10,000 but very happy to go with £9,750. Would Tesco ever charge £10 for a product? I don’t think so.
I work with one company which has been undercharging clients for years. Mostly due to their initial misplaced enthusiasm that price would be the deciding factor (it rarely is) and the crippling effects of the financial crisis. But over time we worked together to significantly increase prices. We managed this because they provide an excellent service and the clients acknowledged they were under paying. Of course, it wasn’t that straightforward. Every situation was unique and required a different approach to meet the circumstances. But it worked and no client fired us.
What can we learn and apply from the short examples you’ve just read about?
Collect pricing data for your products and services and think like a retailer. What could you do to enhance your client offers? How could you be a price disrupter but avoid disruption by more creative pricing? How can you provide clients with more transparency? What can you do to turn project income into sustainable monthly income?
As you know immediacy is something that many companies don’t apply to problems or opportunities. Well I do. Everything is capable of changing now and if the whole task can’t be completed at least make a start. Make every Monday ‘Revolution Monday’ . Start every week in a way that promotes positive change.