The ideal price

By Larry Galler

October 01, 2009

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The price you ask for the products and services you sell is critical.

It is critical to attracting customers, critical to retaining them, and critical to having a profitable, sustainable, enjoyable business.

If you charge too much, customers leave and go to the competition. If you charge too little, then profits are diminished, sometimes to the point of loss.

So the right price is somewhere between “too much” and “too little.”

I’d love to advise you to charge “The Ideal Price” but have to admit that, unfortunately, there is no such thing as an “Ideal Price” that applies to everyone in our industry.

Determine your pricing

So how do you establish the prices you charge?

A simplistic overview of pricing strategies covers a wide range of options. Some charge a percentage markup of the cost because that is the “industry norm.” Others charge a price based on the pricing charged by their competitors.

Those with excess fulfillment or production capacity can increase sales volume by lowering prices, while others choose a pricing structure based on what they think their customers will pay.

Complicating the pricing conundrum is the fact that some customers will pay more for a given product or service if, for some reason, they find more value or have a greater need while others will only purchase that same service when the price is reduced by being “on sale,” with a rebate, or via negotiations.

Pricing examples

An example is the pricing differentiation in one of the most competitive markets — air travel. The airlines have exactly the same goals that you have, which is to squeeze the most profit from each ticket while still making the customer feel they received a good, competitive value.

Airlines charge substantially different prices for the same flight depending on whether the ticket is purchased two months, two weeks, or two hours in advance.

They charge higher fares on flights that are at the more popular times of the day, at peak holiday or vacation seasons, and there are different prices depending on the amenities one wishes to purchase, such as coach, business class or first class.

In the past couple years, most of the airlines have dispensed with serving meals in coach and have removed or reduced the number of pillows and blankets available. They even charge now for checking luggage. Yes, they have angered their customers but, if one is to fly somewhere, the airline customer has few options.

Available pricing options

Your customers, in most cases, have quite a few options, from “do-it-yourself” to “splash & dash” and “bait & switch” practitioners, all the way upscale to posh, super-high-service competitors.

Each option comes with a different pricing structure. Just as the airlines charge different rates for different levels of seats in first class, business class and coach, you can offer different levels of prices for your services.

But most people understand the difference between first class (large, cushy seats with plenty of stretch-out room, meals served on china with cloth napkins, early seating, complimentary alcoholic beverages, and a higher ratio of attendants to passengers) and coach (crowded and uncomfortable cabin… think “cattle car”).

Unlike the airlines, you can’t just use a few words to differentiate the different prices.

So how do you arrive at a pricing structure that manages to create the maximum profit per transaction while giving full value to your customer? This is both a marketing issue and an administrative issue.

On the marketing side, it is necessary to determine your position in the marketplace. Are you “something for everyone” or the “low-cost-price-highly promotional vendor” or the “luxury-highest-service-provider?”

Whatever path you choose, you must be consistent to avoid your customer’s confusion of your marketing message.

Imagine what would happen if Rolls Royce came out with a down-market model with cloth seats instead of the finest leather? Rubber floor mats instead of thick wool carpet? Plastic “wood” instead of matched grain wood appointments on the dash?

On the administrative side, it is necessary to know what your fixed and variable costs are to establish a baseline pricing structure. It is also important to understand what will satisfy your personal ambitions to help establish goals to strive for.

Once you have established your baseline pricing, it will be helpful to maximize opportunities for increased sales volume and margins by offering a “good/better/best” pricing structure where you lay out the options to your customer and let them choose the price level they prefer.

The differences between the pricing levels for a carpet cleaner might be based on the amount of furniture moved, the application of protector and even who vacuums before the work is done.

Again, from a marketing perspective, it will be very helpful if you establish a menu of services and prices that your customer can see so they understand your professionalism instead of thinking you are just “winging it.”

Even is someone wants your lowest cost service, if you present your menu of options properly, you can also offer them as “extras” from that menu so the customer gets their best choice of service, quality and speed.

Going back to the airline example of first class, business class, and coach — the coach passenger can either get the least expensive seat by choosing a flight with two or three stopovers, carry aboard food and luggage or purchase baggage service, take a more convenient (but higher priced) flight and purchase food on board on some airlines.

By giving your customer the power to choose the level of service they want, you will be charging the “Ideal Price” and will lose fewer jobs based on price or level of service.

The “Ideal Price” makes for a happier, more satisfied customer and a busier, more profitable, more sustainable business and that is really the “ideal”!

Larry Galler specializes in coaching owners of small businesses to grow their businesses through effective marketing, customer retention programs, and systemizing their business practices. Explore how he can help you during a free coaching session by calling (800) 326-7087 or email larry@larrygaller.com. Sign up for his informative free newsletter at www.larrygaller.com.