Creatives, Knowledge-based Professionals, Specialists or SMEs–When your firm factors competitor’s prices into your prices, you’ve chosen the one thing that is guaranteed to kill your revenue.
How? Your firm:
- Becomes a commodity without differentiation
- Is subject to every downward trend in pricing
- Needs more and more volume to increase revenue
Three Pricing Points of View
Your firm can look at pricing from three points of view:
- Internal, or costs based
- External, or value based
- Lateral, or competition based
Cost-Plus and Value Based Pricing Work Together
Trivers Consulting Group pricing experts see time and again that there is extreme value in understanding and considering costs. Costs form the foundation upon which value based pricing is built. Costs are not the only factor, but they are an important factor in Value Based Pricing. Your firm cannot guarantee a profit without knowing its costs.
Competition Based Pricing is a Killer
Read any article about how knowledge work services firms should price and either the first or second recommendation will be to factor into the firm’s pricing decisions what the competition is charging.
OMG, no! What the competition charges should never be a factor in your pricing. Your firm does not know the costs the competition is incurring. In fact, you can never know if the competition’s prices are covering all their costs. Maybe they have chosen to run in the red for some reason and for some period of time. Maybe their costs are low because they’ve chosen to under-invest in their company.
Competition based pricing forces you into head-to-head comparisons, or apples-to-apples. Where’s the benefit to that? You cannot differentiate–all apples are pretty much the same. Apple growers know this going in. But your knowledge based firm does not have to choose to be just another apple.
There are companies that decide, for their own reasons, to lower their prices. We could speculate all we want, but we will not know why. The point is that their lower prices force your firm to lower your prices, and puts you in a quandry about how to handle your internal operations and costs.
A competitor should never drive your firm’s prices. If you allow this, you are giving your competitors power over your revenue, your profit, your internal choices about investments and long-term goals. Is that why you founded and continue to operate your firm? I don’t think so!
Take Charge of Your Pricing Model
The choice of pricing model is an executive decision. The Chief Executive Officer may get input from the rest of the C-suite, but in the end, the decision is the Chief Executive’s. I cannot stress this enough: the pricing model the firm chooses affects every single other element of the firm. Not just the outcome, of revenue and higher profits, but every other decision. The firm’s brand identity, its choice of target market, its client recruitment and retention tactics, its research and development team’s work on new offerings, its ability to leverage its resources to exponentially increase profit. The pricing model affects the purchase and deployment of various systems or automation. It affects hiring and employee benefits.
One could say that it’s revenue that affects these elements, not the method by which the revenue is generated. I do not agree! The pricing model affects the volume of revenue and profit. The wrong pricing model may generate revenue and some profit, but they have built in limitations and risks.
Pricing model first, everything else follows.
There are very few CEOs or Founders I speak to who aren’t maintaining revenue, or increasing it gradually year over year. That’s progress and it speaks well of your efforts. If you are one of the few who wants to increase the profits your firm earns, we should talk. Text PROFITS to me at 703-801-0345 and well set up a call.
And remember-never let the competition set your prices!