Quality Covers Costs, Value Increases Profit

You will be buried under an avalanche of advice if you search or ask “How do we price our products and services?” The B-school and CPA approach is costs+profit=selling price.

Buried in approach is the idea that costs will reflect the quality of the inputs. The higher the quality, the higher the price. Low quality offerings get priced lower.

Relying on this approach means that you get no compensation for the value your offerings deliver to your buyers.  Think of any luxury or high-end brand, whether it’s legal services, automobiles or technology, and you’ll immediately describe those brands as having some kind of tangible intangible value: prestige, status, convenience, extraordinary customer service or limited quantities, which makes them rare and precious.

During a Singular FocusSM project with my CEO or Owner clients, we look closely and deeply at the prices of their company’s offerings and investigate the effectiveness of their price-to-value ratio. You can do this right now for your own offerings.

Here’s how it works.

Price ranges

Begin by sorting your P&L data into product categories by price. Choose 4 prices ranges that do not overlap. For example: low range $100-9,999, mid $10,000-49,999, high $50,000-99,999, and high+ begins at $100,000. List which of your offerings fall into each of these ranges.

Insights into What Buyers Value

Assemble everyone in your company who has anything to do with your offerings. This includes marketing and sales, and also the customer service team, delivery providers, and product developers. You may include a cost expert as well. Everyone will discuss the price/value ratio from their perspective, based as much as possible on their personal experiences with buyers.

Ask these questions and record the answers:

  • What do buyers say related to the price/value ratio of this product?
  • How do buyers act related to the price/value ratio of this product?
  • How many buyers buy this again? Never again?
  • How often do buyers request service on this product?
  • What customer service is needed for this product?
  • What else would customers like us to offer that’s related to this product?

The outcome of this discussion is an in depth understanding of the price/value ratio of your full range of offerings. Once you have this deep understanding you’ll be positioned to effectively maximize topline revenue. Many companies have uncovered price/value ratios that surprised them, either by being smaller or larger than they guessed.

Own Your Prices

Let me say, emphatically and with great energy: do not let the competition define your prices, unless what you are selling is absolutely a commodity with no differentiation. Let them limit their revenue to costs+profit, while you grow your revenue by incorporating a premium for value.

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