S7 E17-20 Pricing Strategies for Business owners with Jeremy Gray

Be sure your business will make money before you launch. Planning ahead leads to success.
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Episode 17. The fundamentals of pricing strategy, what you need to know for market success

1. Pricing Strategy is a model or method used to establish the best price for a product or service.  It helps you choose prices to maximize your objectives, while considering consumer and market demand.
   
2. Getting pricing right is not easy, price too high and you will not generate many sales, price too low and you are leaving money on the table.
   
3. Especially when starting out in business your pricing strategies may change as your company grows. You may start with a penetration pricing strategy then move to a profit focus.
   
4. It is essential that if this is the approach you intend to adopt that you plan ahead and plot the change in strategy in advance,  
   
5. Questions to ask yourself:
   
   1. Do I need an income from my business? How much? And When?
      
   2. Will I borrow money? Seek funding? Or bootstrap my business? 
      
   3. What is company’s position in the marketplace? Premium? Mass Market?
      
   4. Your preferred growth curve? Faster growth requires more resources – capital and people 
      
   5. Are you in this business for the long haul? Or is this a “proof of concept” business?
      
      
      
6. You can cater to the rich, and I’ll take the rest; the good Lord made more of them.
   
   1. Kemmons Wilson founder Holiday Inn
      

1. People only buy from you for three reasons:
   
   1. You save them time
      
   2. You save them money
      
   3. You make them feel good
      
2. Understanding the reasons people are, or will be, buying from you will be invaluable in setting your pricing strategy. You may be able to deliver two out of the three. You could save people time and make them feel good. Know your customer’s reasons for buying from you.
   

Tags: How to start a business; Achieve start up success, Pricing Strategy, Pricing for profitability, Pricing objectives, The successful entrepreneur, business common mistakes small business start-up; avoid these common mistakes of business, mistakes in business, IBGR.network, Jeremy Gray, Practical Solutions to Difficult Problems
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Episode 18 Which pricing strategy is right for your business?

1. In this episode we get more tactical we will look at some of the many pricing strategies that are available to you and help you understand which strategies are appropriate for your business.
   
   1. You will likely use a combination of strategies to maximize your profitability
      
2. Competition-Based Pricing Strategy
   
   1. Competition-based pricing is also known as competitive pricing or competitor-based pricing. This pricing strategy focuses on the existing market rate or going rate for a company’s product or service. 
      
   2. Businesses who compete in a highly saturated space may choose this strategy since a slight price difference may be the deciding factor for customers.
      
   3. There are several problems with this strategy. It is reactive, you are following your competitor’s lead. If they reduce prices you may also have to reduce your price.  It does not take into account your cost to produce the product or service. Matching the competition can lead to very thin profit margins that may not be sustainable. Finally, if your product or service has a benefit beyond your competitors which you do not recognize, you maybe be leaving money on the table
      
3. Cost-Plus Pricing Strategy    
   
   1. A cost-plus pricing strategy is based on the cost of your product or service to which you apply a mark up to achieve a targeted profit or margin.
      
   2. This is the fall-back strategy of many companies because it does guarantee a gross profit on every unit sold. Unfortunately, it is not the ideal pricing strategy for most industries except maybe retail where it is used to set a base line. 
      
   3. The advantage of cost-plus strategy is in its simplicity. 
      
   4. The disadvantages include that it does not take into account the other overheads of the business – Factory overhead, selling expense, R&D, General Administration.   A useful tool is to look at how many units you need to sell to breakeven. If the product you sell for $100, yields a gross profit or gross margin of $40. If your Factory Selling R&D and G&A expenses total $400,000 you will need to sell 10,000 units to break even. 
      
   5. But the biggest failure of cost-plus pricing is that it does not take into account the price the consumer is willing to pay for your product. In our example maybe the customer would be willing to pay $120 or $140. In which case you are leaving money on the table. Or maybe they only value your product at $90 in which case your sales maybe zero.
      
   6. Sadly, many organizations, even those that claim to use value pricing default to cost plus pricing. Business managers when setting pricing still revert to cost plus pricing. Part of the reasoning is that business are generally measured by external parties like business analysts by three key metrics. The size of the business, its earnings and the quality of the business or its gross margin or profit percentage. So, a product that might deliver excellent sales and profit fails because it is overpriced to protect the businesses gross margin %.
      
4. Freemium Pricing
   
   1. A combination of the words “free” and “premium,” freemium pricing is when companies offer a basic version of their product for free hoping that users will eventually pay to upgrade or access more features. Unlike cost-plus, freemium is a pricing strategy commonly Apps such as Runkeeper. They choose this strategy because free memberships offer a “peek” into a software’s full functionality — and more importantly also build trust with a potential customer
      
   2. With freemium, a company’s prices must be a function of the perceived value of their products to enough customers to make the business viable Prices must present a low barrier to entry, preferably free, and grow incrementally as customers are offered more features and benefits. Note a relatively small price for premium service can be a solid pricing strategy. For example, I mentioned RunKeeper early. I used their free service for a number of years, and it gave me all the functionality I required. However, after awhile I began to feel guilty about getting something for nothing and as the cost to upgrade to their premium service was not a lot and did give me some benefit I paid for the upgrade. As human beings we feel the need to reciprocate for benefits received so I am sure I am not the only person who behaves in this way.
      
   3. I am not sure it is a negative of freemium pricing, but the challenge is to provide enough functionality to attract potential customers to the free product while have enough functionality or value to encourage the free user to upgrade.
      

Price is what you pay, value is what you get.
Warren Buffet – Berkshire Hathaway
Tags: How to start a business; Achieve start up success, Pricing Strategy, Pricing for profitability, Pricing objectives, The successful entrepreneur, business common mistakes small business start-up; avoid these common mistakes of business, mistakes in business, IBGR.network, Jeremy Gray, Practical Solutions to Difficult Problems

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Episode 19 – Pricing strategies for start ups

1. Skimming Pricing Strategy
   1. A skimming pricing strategy is when companies charge the highest possible price for a new product to early adopters of new technology and then lower the price over time to attract later adopters and a product cost decrease due to efficiencies and economy of scale. I can recall when digital watches were first introduced in the early 1970’s their prices were the equivalent of an expensive analogue watch. Prices quickly fell and today a digital watch can be a throw away fashion item.
   2. A couple of disadvantages of a skimming strategy are it can upset customers who paid a higher price for an item only to see it offered a much lower price soon after they purchased the item and secondly if the high price is held too long it can create a margin umbrella for a competitor to enter the market and take away your leadership position.
2. Penetration Pricing Strategy
   1. Contrasted with skimming pricing, a penetration pricing strategy is when companies enter the market with an extremely low price, effectively drawing attention (and revenue) away from higher-priced competitors. 
   2. This pricing method works best for brand new businesses looking for customers or for businesses that are breaking into an existing, competitive market. The strategy is all about disruption and temporary loss … and hoping that your initial customers stick around as you eventually raise prices.
   3. A challenge to businesses that follow a penetration pricing is that it invites a price war with the incumbent businesses. Your more established competitors may drop their prices with the intention of preventing you from gaining a foothold in their market. 
   4. The second problem is ensuring you have the valuation proposition to allow you to raise prices and keep the customers you have gained with your low-price offering
3. Premium Pricing Strategy
   1. Also known as premium pricing and luxury pricing, a prestige pricing strategy is when companies price their products high to present the image that their products are high-value, luxury, or premium. Prestige pricing focuses on the perceived value of a product rather than the actual value or production cost.
   2. Prestige pricing is a direct function of brand awareness and brand perception. Brands who apply this pricing method are known for providing value and status through their products — which is why they’re priced higher than other competitors. Fashion and technology are often priced using this strategy because they can be marketed as luxurious, exclusive, and rare.
4. Dynamic Pricing Strategy
   1. Dynamic pricing is also known as surge pricing, demand pricing, or time-based pricing. It’s a flexible pricing strategy where prices fluctuate based on market and customer demand. The best-known global example is Uber. Or here in Singapore Grab – Example of closing of bars at 10:30

Tags: How to start a business; Achieve start up success, Pricing Strategy, Pricing for profitability, Pricing objectives, The successful entrepreneur, business common mistakes small business start-up; avoid these common mistakes of business, mistakes in business, IBGR.network, Jeremy Gray, Practical Solutions to Difficult Problems

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Episode 20 – Value Pricing – is it really that difficult? How Value Pricing will maximize your profits

1. Value-Based Pricing Strategy

1. A value-based pricing strategy is when companies price their products or services based the price that the customer is willing to pay for a product. How you establish what a customer is willing to pay can be challenging and is a reason why many companies shy away from value-based pricing and revert to cost plus pricing.
2. If how much money you can save your customer can be estimated in dollar terms this can used as a basis for value-based pricing. It is harder to value time saved, sometimes it is clear, sometimes it is not.
3. When your product or service saves you customer money. Say you estimate that your product will save your customer $100. An economist may argue that you could sell your product for $99 as this would still benefit your customer to the tune of $1. Of course, this is nonsense, although mathematically it might make sense no customer is going to spend $99 to save a dollar.
4. Maybe you could charge $50 for your product and split the savings with your customer. Maybe, if there were no switching costs and your customers was 100% convinced that the projected savings could be achieved.
5. But there are always switching costs and always some doubt that the product and service will deliver the savings projected. Research has shown that customers are more likely to switch if they can see a four or five fold advantage in switching. So, for the $100 savings you can deliver you will probably be able to charge $20 to $25. Seems unfair doesn’t it the customer gets $75 or $80 of savings, and you get a miserable 20 or 25 bucks. Never mind once the value of your product is proven you will be able to raise your price but it’s unlikely you will ever get to a 50/50 split.
6. The same applies where time savings are quantifiable. If the cost of a construction crew is $500 per hour and you can save them two hours the benefit of your product or service is $1,000. Probably you could sell your product for around $200 to $250. 
7. For most products and services, it is impossible to quantify the value in the eyes or mind of your customer. So how do we go about determining how much the customer is willing to pay?
8. You have to focus on a specific segment. If you are a B2B company you may have to focus down to a single customer, as the price customer A is willing to pay may be different to the price customer B is willing to pay. 
9. Compare your product offering with next best alternative. What would my customer buy if my product was not available? Singapore Airlines might compare their business class service to Ho Chi Minh City with Vietnam Airlines direct flight from Singapore to Ho Chi Minh, or Malaysia Air service via Kuala Lumpur.
10. You should then need to figure out what is features in your product offering are unique, what differentiates your offering from your competitors. Maybe Singapore airlines are flying planes with a more recently upgraded business class seating that is superior the Vietnam airlines, maybe their food and drink offerings are better quality and a more extensive range of choices. 
11. Finally place a dollar value on the differentiation. How much is the superior Singapore business class interior and better food, and drink is worth versus Vietnam Airlines offering. More accurately we are trying to estimate how much more is a passenger willing to pay for the more comfortable surroundings and the higher quality of catering.

 

1. Some of the misconceptions about value-based pricing.
   1. Value based pricing will lead to success every time. Sadly, this is not always true, remember in every strategy or tactic you follow your competitors gets a vote. If your competitor markets their product or service at a price well below what the customer is willing to pay there is no way you will be able to achieve the true value of your offering. If you are lucky, you have smart competitors that understand the value. However all too often it seems there are one or two competitors who do not understand the value of their product, you look at their pricing and shake your head wondering why they are leaving so much money on the table. Of course, if they are new to your market place they could be using penetration pricing to gain share but if they are established then they are just dumb and there is not a lot you can do about that.
   2. Value pricing is difficult because I need to put a value on all the features and benefits of my product or service. This is a dangerous misconception because it causes marketers to avoid value pricing because it is so hard. In reality you only need to consider and value the differentiating features. Take our airline example, in setting value pricing for their business class service to Ho Chi Minh City Singapore airlines only have to put a value to their more up to date cabin and food and beverage service. 
   3. The brand’s reputation is part of the value. The concept behind value pricing is identify features that add value to the customer and get be converted in dollars and cents. Although Singapore Airlines has an outstanding brand image it would not be part of a value pricing calculation.

Tags: How to start a business; Achieve start up success; Pricing Strategy, Pricing for profitability, Pricing objectives; Value Based Strategy; Best Pricing Strategy; The successful entrepreneur; business common mistakes; small business startup; avoid these common mistakes of business; mistakes in business; IBGR.network; Jeremy Gray; Practical Solutions to Difficult Problems


I am committed to helping entrepreneurs succeed. I can bring the experience of 30+ years of experience at the C-Suite level in an MNC from Europe, North America, and Asia. Combine this with seven years of helping a diverse range of businesses and I can provide you with practical solutions to any difficult problems you may be facing. 

Please do not hesitate to contact me for chat via the following links:
mailto:jeremy@business-in-asia.org

Or schedule time via Calendly:
https://calendly.com/3-continents-consulting

My websites include:
https://business-in-asia.org/
https://thedentistscfo.com/

My LinkedIn URL
https://www.linkedin.com/in/jeremy-gray1

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