Pricing Strategy to Drive Profit!

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Pricing Strategy

to Drive Profit!

Pricing is underestimated as a driver of business growth. Panalitix clients are increasingly benefiting from our PriceEvaluator solution which helps to set price.

“Getting new clients” is what accountants first think about when they want to grow. Then they think of “selling more to existing customers”. These are both plausible ways to grow a business… though a change in pricing can bring even better results to the bottom line.

But how much should you actually charge? What if you lose clients because prices are too high? These risks can be reduced through good pricing strategy. Here are some points to consider:

1. “Cost plus” analysis:

This is a starting point which signals the minimum price you’d consider charging to remain profitable. In an accounting business, gross margins are relatively easy to calculate because Costs of Good Sold are mostly labor costs.

2. Competitor Pricing:

The general rule is customers will buy from the cheapest supplier PROVIDED THAT they have perfect information on all products (i.e. price comparisons are readily accessible), which they seldom are. Also, this assumes competing products are (perceived to be) identical, which they seldom are. If you plan to price your products more than the competition, you will need to persuade the buyer that you have some competitive advantage.

3. Important Price Points:

Consider the pricing ‘extremes’ and other major price points. At what price is your service so expensive that no one would buy it? At what point is your service so cheap that no one would buy it (for a perceived lack of quality)? At what point is your service getting expensive, but some would consider purchasing it? At what point is your service viewed as a really great deal?

4. Premium Pricing (or luxury pricing):

This examines the perceived value of a product rather than the actual value or production cost. If your product is considered luxurious, exclusive, or rare (such as a tax adviser to celebrity clients), this may apply.

5. Surge pricing, demand pricing, or time-based pricing:

This acknowledges the fact that a customer’s willingness to pay varies based on the time or circumstances. It occurs in ALL businesses. A client who is facing a heavy penalty or is under time pressure may pay a higher fee for a service. A flexible pricing strategy in response is helpful.

6. Value pricing:

In this case, you price your products based on what the customer is willing to pay. Put another way you price based on the economic value your customer puts on the product. This can be useful IF you REALLY understand your customer, their situation, their persona and thought processes.

7. Transactional pricing:

What is the lifetime value (LTV) of your customer? Is this the only deal you are likely to do with this client? If so, you should recover as much value as possible from this transaction. That’s not the case if there are many up-selling opportunities.

8. Payment terms:

Payment terms form an important part of pricing. Would you rather receive $100 today or $150 in three months? As important, perhaps, would your customer rather PAY $100 today or $150 in three months? The value of cash in your business and the risks of waiting for payment will influence price strategy.

9.  Price Sensitivity:

How would customers react to a change in price? If your customers continue to buy from you after you raise prices, that means they are not ‘price sensitive’ (or the market is ‘price elastic’). It might also mean that your pricing is too low (compared to market rates). This will probably vary by service. For example, increasing the price of a ‘commoditized’ service such as filing a tax return, will result in a significant reduction in demand.

10Discounts / promotions:

Some businesses will never offer discounts while for others, this will be normal practice. An important question is what advantage you secure by offering a discount. Does this increase the chance of closing a deal? Does it result in a more loyal customer? The same can be said for promotions or ‘specials’ (such as buy-one, get-one-free)

Some final points:

Keep pricing simple: Sometimes the actual price (the quantum) is over-emphasized compared to the transparency of pricing. In a service business, for example, the price may be unclear at the outset of the project. Reassuring the customer about HOW the price will be calculated and the RANGE of pricing they can expect can be as important as the size of the final bill. A project-based (fixed) price strategy often overcomes this concern.

Modify your products to make them more attractive (and attract a higher price): Filing a tax return will attract a certain price but what if this were ‘bundled’ with other related (or unrelated) services. What does the client value? Access to the partner? Commentary / analysis on the state of the business? An event invitation? Perhaps you can configure products so that they can drive a higher price than the individual parts.

Adjust your pricing often: Firms that consistently re-evaluate price get better outcomes so this should be built into regular business planning.

PriceEvaluator by Panalitix helps ensure pricing strategy will support your business irrespective of whether you are prioritizing new customer acquisition, revenue growth, profit growth, entering new markets, market share growth etc. Get in touch to learn more.

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ABOUT THE AUTHOR

Mark Ferris
CHAIRMAN & CEO, PANALITIX

Mark is an entrepreneur who has founded, built and sold a number of businesses, mostly in the information technology industry. His businesses have served major multinational companies in areas including business intelligence, process improvement and procurement across Asia, North America and Europe.

As an investor, Mark focuses on early-stage technology businesses with an interest in SaaS companies and providers of content. Mark lectures in an Executive MBA program on entrepreneurship, mentors numerous businesses and is a frequent speaker in business forums.

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