TL;DR

We've had the opportunity to consult with hundreds of entrepreneurs and small businesses over the years. And through the course of many conversations, the subject of Pricing is by far, one of the thorniest:

• Am I charging enough?
• What if I scare my prospects away?
• How can I test different pricing levels?
• What other decisions am I making that's affecting my profitability?

Full Text

[Pricing Practices]

by Peachtree Labs

When you buy or sell anything – whether a gallon of milk, a plane ticket, or a tax return service – a discussion of price is inevitable.

But pricing is straightforward, right? That’s what most people think. If you’re a large company with public pricing and competition, it must be easier to price. Well, yes – and no. What is it that you are selling and how differentiated is it?

Let’s examine three potential purchases:

Gallon of Milk

For a gallon of milk, you can, through visiting multiple stores, figure out the pricing. It’s transparent and displayed clearly. And within reason, the quality of the milk is identical or at least very close to the same, regardless of where you buy it. Sometimes the brands are even the same. So does everyone buy the lowest priced milk? No. The price of milk is also tied to convenience (how close to your house, how easy to checkout, and what other shopping you can do while buying milk). So if one milk is $0.50 more than milk at another store, but you don’t want to go to another store just for milk, you’re highly likely to just pay a bit more. If it were $5.00 more, you might reconsider.

Plane Tickets

When purchasing a plane ticket, you can quite easily search and compare prices, by searching online. The pricing is transparent. But while the product seem the same – air travel from A to B – the trip and experience may be quite different:

• Departure/arrival airports
• Departure/arrival times
• Layovers versus direct
• On-time arrival percentage
• Charges for baggage
• Comfort and quality of cabin
• Loyalty programs

The “experience” element of the airplane is absolutely factored into the pricing. That’s why a Delta flight from ATL-SFO can be significantly more than a similar Spirit flight. Demand also is at play. The more demand for a single flight, the higher the pricing. Ultimately consumers need to balance price and experience to see which one they value the most.

Tax Return Service

Comparing the price of a tax return is much more difficult. It’s a service. Yes, there is relentless advertising for H.R. Block and TaxSlayer, with a seemingly fixed price. But any level of complexity makes it hard to compare. So too does the reputation and skill of the tax preparer. You won’t find prices online for most tax preparers. What you’ll see “call for quote” pricing. That is inherently opaque pricing. You’ll have to do research to even determine the range of quotes, then make a decision not only based on price, but your trust in the tax preparers competency. Price is a factor, but unlikely the single factor when choosing anything but a vanilla tax return.

What does this mean for a One-Person Business?

You most likely sell something unique – you! Most OPBs have highly specialized offerings that aren’t clearly comparable in the market – this helps you with pricing. You, like the tax preparer, and to some extent the airlines, can set your price. But beware, most OPBs undersell themselves because they don’t place the right value on their services. I’ll talk about creating value in a separate document, just know it goes hand-in-hand with pricing.

Peachtree Labs - Getting to ‘No’ Framework

The Getting to ‘No’ Framework is an exercise that all One-Person Businesses (OPBs) need to do regularly. Why? Because if you can raise your price and you sell the same number of services, the price increase is 100% profit with no effort on your part. That bears repeating. Price increases that are accepted by customers increase your profit with no additional effort.

Here are two exercises you can – and should try – today to increase your price:

1. Raise prices methodically
2. Double your price and offer decreasing discounts

1. Raise Prices Methodically

Take your current price and increase it by 10%. Keep doing this until the value of the increase no longer benefits you.

Let’s take a quick example. Imagine you have a service for which you charge $1,000. It costs you $800 to deliver the service (this includes costs of goods sold, marketing and sales expense, travel, etc.). Your profit on a $1,000 service is $200 ($1,000 - $800). That’s a 20% profit margin ( 200 [profit] / 1000 [revenue]).

Imagine you sell 100 services at $1,000. That’s $100,000 in revenue; $20,000 in profit; and a 20% profit margin. Now let’s experiment with price increases:

If we increase the price by 10% to $1,100 and sell the same number of units, our profit goes from $20,000 to $30,000 – an increase of $10,000. The margin increases from 20% to 30%. So the price increases 10% but profitability increases by 50%! How much work did you have to do to serve a customer with a 10% higher price – zero. That’s the power of price increases. But it likely doesn’t stop there.

You can see in the above example, every increase in price brings more profit, until the final price increase. That’s when you “Get to ‘no’”. Imagine now charging $1,331 for an identical service and making $45,135 in profit versus $20,000 at your original pricing. Remember, your effort is exactly the same in both scenarios.

That’s the power of pricing, when done in a test-and-learn, methodical way.

2. Double Your Price And Offer Decreasing Discounts

You can do the same exercise above but instead of bottom-up increases, you do top-down discounts. Amazon, Macy’s, and a host of companies use discounts as a psychological tool to make customers feel they are getting something of high value for less.

 Here’s how it works. You take your same service, currently at $1,000, and double it to $2,000. You then add decreasing discounts to “Get to ‘no’”. See an example below:

In this example, the highest total profit is by displaying a price of $2,000 but with a discount of 30%, so a net price of $1,400. It produces a profit of $45,000 or $25,000 more than the original pricing.

Our online course goes into much greater detail about the pricing and includes other insights on money, including: pricing of ideal and non-ideal customers, understanding the role costs play in profitability and how to manage costs smartly, and why making and keeping money are not the same. The materials are a valuable resource to help guide you through different options of how to increase your sales and profit.

We look forward to serving you and your business through our Online Courses or in our 1:1 Coaching Program.

Thanks for reading!

Peachtree Labs