PRICES NEED SCIENCE NOT GUESSWORK

SERIAL ENTREPRENEUR AND AUTHOR

PRICE is well known to be the single most powerful determinant of profit, so why continue to use guesswork more than science?

What is the right price for your product and service? Do you really have an educated idea? Have you gone to the trouble of testing and checking different prices, or is it just an annual finger in the air exercise for you, after a quick look round at the competition? Perhaps you’re more the “cost plus target margin” sort of guy?

Have you ever stopped to ponder that almost everyone who has ever bought anything from you would almost certainly have paid you more; sometimes a lot more? Setting your prices lower than you could do is like holding four of a kind in a hand of poker and seeing two pairs.

AUSTERE TIMES
In these more difficult and austere times, you might now reflect on just how important your pricing strategy is to the dream of that Aston Martin in the drive. Seriously successful companies like Google, Dell, Nike and IKEA, and even those we love to hate like Ryanair -- all offer crystal-clear propositions founded on and reinforced by bold and innovative pricing strategies. Pricing is not an aftera thought, it’s the beating heart of a winning formula.

Only in a Monty Python sketch are your customers ever likely to come in and negotiate you up to a higher price. But it’s a complicated zone in which to tread carefully. We will scream blue murder at Amazon for the late delivery of a CD sent across mountains, oceans and whole continents, from the other side of the world to your front door, but will unilaterally leave a voluntary 10 per cent tip to reward the arduous and complex logistical challenge of delivering a pizza all the way from the kitchen to our restaurant table.

EFFECTIVE PRICING
The secret to effective pricing is to find multiple ways of placing yourself in the shoes of the customer, to be bothered enough to invest the necessary time to understand their situation and what it is that they value enough to pay for and to build your pricing model accordingly. Fairness and credibility are the critical backbone to every sustainable pricing strategy. So what should you do?

Firstly, put your prices up if you offer good value. Don’t be scared. Think about it. You instinctively know that lower prices would mean lower profits, unless you’re redefining your whole sector a la eBay. So, why not go in the other direction and make more money? Secondly, offer differentiated prices to those who appreciate different aspects of the offer. Think Ryanair. If you want a cheap flight to Krakow, you need to remember to get in early because by booking last minute you will have paid about 50 times more than the guy now sitting to your left.

EASY TO FIND
And finally, keep your prices easy to find, easy to read, easy to understand and reflective of your market positioning. It’s always a mistake to con your customer, even if you can get away with it in the short term. That cheap Rolex you’ve had your eye on is a fake. As a rule of thumb, we do still get what we pay for.

Alex Pratt is a serial entrepreneur and the author of “Austerity Business: 39 Tips for Doing More with Less”, published by Wiley, £12.99.