In more than 25 years of making pricing decisions and of observing others making pricing decisions, I have come to the conclusion that there is no single business decision that you can make more quickly, but which deserves more thoughtful consideration than the decision of what to charge for one’s goods and services. As a business coach, it still surprises me that business owners and managers don’t do the right analysis before making this critical decision.
If you set your prices too low, you’ll lose money! Set your prices too high and you’ll also lose money! Lets look at an example: if your Gross Profit Margin = 40%, then a 10% decrease (or increase) in prices will decrease (or increase) Gross Profit by 25% (assuming no change in volume). Net profit (what is left after you’ve paid everything) will change even more dramatically.
But wait a minute; if you decrease prices won’t you make it up in volume? Maybe. Using the same assumptions – 40% Gross Margin and a 10% price decrease, since you are selling the units at a lower price and therefore a 25% lower margin, you’d have to sell 35% more volume just to break even on your price discount! You will need a great marketing plan & sales process to ensure more than a 35% increase in volume. And that’s just to break even. Plus you’ll be working a lot harder to produce a 35% increase in volume, to get the same net profit.
Instead of considering discounting to increase your bottom line, think about how you can add value and charge even more. The best way to remove price as an objection by your buyers, is to have a strong and sustainable Unique Selling Proposition. A strong USP will distinguish your business from all the competitors. It will make you the obvious choice in a sea of competition and lead prospects to the conclusion, “I would have to be a fool to do business with anyone but you…regardless of price.” Your USP is something that your competitors can’t or won’t say, that you can uniquely deliver. And it will change the conversation with your prospects from cost based, to value.
USP is a simple concept, but not easy to do. It takes a focused, dedicated process to discover your own USP. It isn’t going to just appear magically. In his book, Purple Cow, Seth Godin explains that the USP must be as remarkable as seeing a Purple Cow. And just like a purple cow, sometimes you have to sit down at the drawing board and create one yourself.
Lisa Walker, ActionCOACH, is a Certified Business Coach who provides services for small and medium sized businesses, helping them to grow and become profitable through the use of proven tools, methodologies, and systems. Lisa targets her clients’ individual needs so they can achieve their goals and realize their dreams.