The price you charge for your product or service is one of the most important business decisions you make. Setting a price that is too low will - at best - limit your business growth. At worst, it will cause serious problems for your sales and cash flow.
So how do you know if you're pricing too low? Nick Cronin from ExpertBids.com says "as bad as it sounds, if no one is complaining about your cost, you may want to raise it". Lawrence Steinmetz the author of the book 'How to sell at margins highers than your competitors' adds "If you suddenly start getting lots of new customers, and you haven't been out there beating the bushes, advertising, promoting, marketing and prospecting - they're just... swarming in through the door - your prices are too low" or if your customers are buying more than they need, and you know it, it is often because they are afraid they will not be able to get such a good deal in the future.
AN INDUSTRY VIEW: AVIATION
Today, air travel has become one of the most popular and convenient forms of transport. With a wide range of airlines to choose from, competition is high, and customers can often be quoted vastly different prices for the same destination on the same day. Completing a quick search on Skyscanner, for flights from London to Madrid at the beginning of November, shows I can buy a return ticket for as little as £53 on Ryan Air versus £137 on British Airways. Surely Ryan Air is pricing too low?
In a sense their price is low, but this is because they have a very tight control over their costs to ensure they can provide a very attractive airline fee. This is done through lower airport charges, as they select gates that are the furthest from the departure terminal hub, or use regional airports instead of more expensive international airports. 100% of bookings are completing via the internet, reducing the need for expensive sales staff, and they use just one model of aircraft (Boeing 737-800), meaning is it less expensive to maintain due to e.g. consistent parts and expertise required. British Airways on the other-hand is offering a different level of service. They are the "Frills" airline where you are buying the experience of being able to use the lounges, being a member of their executive club, alongside better food options whilst on board and so on.
Ryan Air has grown to become the biggest airline in Europe. Still convinced they are charging too little?
AN INDUSTRY VIEW: SUPERMARKETS
The supermarket industry has witnessed quite a turbulent few years, as "Price Promises", "Price Matching" and "Lower Prices" has taken hold and started a full blown price war. These low prices are harming their businesses, and the "big four" (Tescos, Sainsburys, Asda, and Morrisons) have all reported slow downs and profit warnings, with their 72.8% market share the lowest for a decade.
Waitrose on the other hand, whose boss has been quoted as saying "our strategy is to do the opposite of what everyone else is doing" is one of only three supermarketsto grow it's market share. Waitrose focuses on promotions and providing value to members, rather than lowering its prices. The supermarket is making a major push into fresh food-on-the-go in particular following the success of its move to offer free tea and coffee to members of myWaitrose, and the "welcome desk" concept, which is already in 127 locations and aims to emulate the type of service you would find in a hotel.
Customer's may want prices which are simple, consistent and low, but the Waitrose example has shown they also want value.
WHAT IS THE RIGHT PRICE?
There is no quick way to finding the right price after you have determined your prices are too low. It will involve testing, research and confidence. Derek Shanahan from SuperRewards says "The best way to test increasing your product cost is to increase your product cost and test your results against your previous price point. That could mean simple webpage A/B testing, or going into a new market with a new price and seeing the result."
Rishi Shah from Digioh says is to ask to your customers."The best way to figure out if the customer will pay more for your product is to simply raise your price and see their reaction. If they say yes, you just made more money. If they say no, tell them you will give them a special discount. If you're a web company, simply set up a landing page with higher prices. If your conversion rate doesn't go down, then keep upping the price!"
Finally Reg Rollett from Ambitious Media Group says "Most people never really think about the lifetime value that their product or service offers. If you help people save thousands on their taxes, can you charge a premium? I bet you can because their is inherit value on what your service offers. Think about that value and raise your prices accordingly; you will be surprised at just how low you are valuing them right now."
This article has shown that there are key alarm bells if you're pricing too low. Once these have been established, the only way to assess the impact of price changes is to TEST, TEST, TEST, and support price rises with ensuring your value is clearly articulated to your customer base.
It is important to take note, that the Ryan Air example shows that there is nothing wrong with being the cheapest if you have the business model to support it, such as having a firm control of your costs.
You may also like
- The discount deception. Why dropping your price hurts you.
- Make discounting work for you, NOT against you.
- The Silent Profitability Killer.
- How to Sell at Margins Higher Than Your Competitors, By Lawrence L. Steinmetz, William T. Brooks.