Four ways to work out the best price for your product or service
Monday, November 10, 2014/
Ned Dwyer launched his web development business Tweaky in 2012 as a way for SMEs to make small changes to their websites for a set fee.
The idea was to charge people $25 per tweak – hence the business’s name – for services such as adding a shopping cart button or a new logo to the website homepage.
However, issues with the business’s pricing strategy soon became apparent.
“When we looked at the economics of it, we quickly realised to get to $5 million [in] revenue we’d need to be doing 40,000 tweaks in a week,” Dwyer tells SmartCompany from San Francisco.
“We moved our rate to $39 as we thought it was a better reflection of the work that goes into a tweak. The idea in general was many projects would be made of many tweaks, and that would justify the costs of acquiring those customers.”
However, after 18 months of solid growth, Tweaky moved to the United States and Dwyer decided the company needed to change the way it operated. Now called Elto, the business still offers $39
tweaks but also offers “packages” such as $349 to “grow your email subscriber list”.
Dwyer’s story shows that businesses need to get their pricing right in order to succeed. SmartCompany spoke to two leading finance experts for their top tips on how to develop a top-notch pricing strategy.
1. Have a holistic approach to pricing
Jan Barned, principal of Financial Management Trainer, has given many talks and presentations on how SMEs can set their prices and manage cash flow effectively.
“One of the key issues is to get the pricing right and a lot of them [SMEs] struggle with it because they often look at one aspect,” she told SmartCompany.
“So they may look at either how much it costs them to produce their product or service or how much their competitors are offering or what the customer is prepared to pay. In actual fact it should be all three of those plus anything to do in terms of hidden costs.”
John Manning, the founder and managing director of PricingProphets, agrees that small business operators need to consider the bigger picture.
“Customers care about value not cost,” he says.
“While they [business owners] can talk about value, the actual customer may value something completely different to what they think their value is.”
2. Know your customers
Manning says it is crucial to understand your customers. That way, if you need to change your prices, you’ll be one step ahead and anticipate how they will react.
He says knowing what the customer wants allows you to give them tailored choices, which means rather than choosing whether or not to use your services they are more likely to consider which pricing model they should go for. This could include, for example, a subscription-based model or a pay-per-use system.
“The basic number in pricing is three – always give the customer three choices,” he says.
“Two options forces them to make a price-based decision. With three, they have to make a value-based decision rather than a price-based decision: ‘Which one do I purchase’ rather than ‘Do I purchase at all?’”
Barned says understanding your customer’s “buying behaviours” is critical.
“You need to be aware of your customer wants and why they’re purchasing from you,” she says. “Build a loyalty that is centred around the service you provide rather than the price.”
She uses the example of good coffee: if your customers are after good coffee, and you provide that service but lift the price by 20 cents, they are going to come back rather than choose a poorly made coffee from another outlet.
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