Is pricing the exact number I charge my clients? Is it a range? Or is it how we think about our value, so we make a profit on what we sell?
Pricing includes all of these. I answer these FAQs in today’s newsletter.
Let’s start with the question that most people get stuck on:
“Where do our prices come from?” or “How do we determine our prices?”
The first thought is that the price should cover all the company’s costs with some left over for profit.
That’s a great basic understanding of pricing. If you fail to cover your costs, you will quickly go out of business. (Or accumulate debt.)
From a strictly math point of view, your costs are the first answer to “where do our prices come from?”
However, you deserve more than a bit “left over” after covering costs.
That’s where the question of value comes in.
Put yourself in your clients’ shoes to answer.
They ask, “Is the price I pay less than the value I believe I am receiving?” If it is, then to that buyer, the price is fair or correct.
This adds complexity to the seemingly simple idea that prices ought to cover costs with a bit left over for profit.
- Who are your buyers?
- What’s important to them?
- What will it take for them to think that the value they get is more than the price you’re charging, therefore it’s the right price?
The more distinctive you make your company, the higher the value to the right buyers, and the higher the price.
That understanding is not found in your financial statements.
It goes to the heart of the company’s corporate strategy.
Who are our desired buyers and why would they buy from us? Answer that well and your prices will follow.
Another FAQ is “what do we do about the competition?”
My answer is “nothing.”
That is, any company that competes for the same buyers will be making its own internal calculations. You cannot let your responsibility for management effectiveness be governed by external actors. They do them, you do you.
Buyers may try to compare you to others.
Marketing has to show that the value the buyer gets exceeds the price they will pay. It’s a marketing problem, not a pricing problem.
Another FAQ:
“I don’t have time to study and analyze my financial reports.” As long as there’s a profit on the bottom line, can’t I just go with my gut feeling for our prices?
I understand the feeling that there’s never enough time for everything but…there is NOTHING more important than spending time understanding your financial reports.
First, make sure you have a skilled bookkeeper. They enter the data that generates the financial reports. You know the old GIGO-garbage in, garbage out. That is so true about bookkeeping.
Then you need someone who knows how to use the data to create financial reports that are meaningful for your company.
Not all financial reports give the same insights, and not all financial reports are the same for each industry, each sector, and for sure, each company.
Make sure your financial reports work for you.
While your P&L will show you overall revenue and expenses, depending on your company, you likely also need a report that breaks down your revenue and expenses by service or product line.
When people talk about the importance of “better decision making” this is one of the biggest decisions: what do we offer to our buyers?
The answer to that question again goes back to your corporate strategy. Who are your buyers and what do they value?
Value vs. IMPACT
Since I created the concept and coined the term IMPACT Based Pricing several years ago, I’ve been asked what’s the difference between IMPACT and value?
I believed in the idea of value based pricing for a long time. I knew that I and many others whose knowledge and expertise make client’s lives better were delivering value.
Then it became clear that the word value was being de-valued.
Too often it was used to denote a “deal” — that the buyer would be getting more for less. That was a far cry from the original idea.
Value also became harder to determine. No two people seem to agree on the value of something that is priced at $100, or $100,000, or $1 million.
Numbers are interpreted uniquely by each of us. When knowledgeable experts tried to make offers connected to a dollar value, prospects and clients would balk, and say that’s not valuable to me.
If you understand only one thing about IMPACT Based Pricing, please let it be this:
the buyer or prospect defines the IMPACT that they need, want, or desire.
Your company then promises to deliver that IMPACT for a price proportional to the IMPACT as the client has described it.
No amount of inputs or outcomes will make an offer worth a price unless the client sees them a making a desired IMPACT possible.
Have more Questions?
Or text FAQS to 703-801-0345.
