The Pricing Dilemma: Finding the Right Balance

There is a tension inherent in the relationship between a business and its customers when it comes to pricing of a product or service. Customers look at prices with a complex eye in determining whether the tradeoff between cost and value is a fair one for them to make. The value proposition that your business offers its customers is based on a mix of the product or service offered, the perceived convenience of buying your offering, your marketing efforts and how you “sell” it to them and, finally, your pricing. These are (in essence) the legendary four P’s of marketing: Product. Place. Promotion. Price.  When a customer is deciding between yours and a competing offering they determine for themselves the order of importance of these elements and determine if the price you are asking is a price worth paying.

This does not mean, for instance, that a customer will always choose the lowest priced offering available. There are other factors that may warrant paying more. Convenience, for instance, looms large in making a determination. Yes, the deli on the corner may charge me more for that gallon of 2% milk than the supermarket, but the supermarket is 5 blocks away and I want my milk now. Done, I have just justified paying 35% more for my white nectar.

The product itself may be the determining factor for a consumer of your goods. Can you charge a premium for superior quality or better features? Just ask anyone who chose a Mercedes over a Toyota. Consumers (whether end-users or other businesses) will compare product features as long as they believe that the thing they are buying is not a commodity that can be purchased elsewhere for less or purchased more conveniently (see the last paragraph, right?).

The next ingredient in your customer’s mix is your own marketing, branding, and promotional efforts. How your brand is positioned is key to many of your customers when deciding if the value you offer is equal to or greater than your competition. Your company may be built on its ability to operate efficiently, or it may be built on the relationships you develop over time with your customers and a deep understanding of their needs, or it may be built around your ability to develop the best, most innovative products or features. But at the end of the day it is the customer who determines whether the value you present in your promotional efforts is of the mix they seek.

All of this brings us back to price. How much you can charge for your product is a function of all of those components and how the customer perceives them. Many businesses will experiment with pricing looking for just the right balance of value and quality; indeed in the past 20 years or so we have seen more and more industries move in the direction of dynamic pricing where company adjusts it’s prices on a day-by-day, even minute-by-minute basis determined by current demand, competitive analysis, season, weather, even the day of the week or the time of day. Think airline tickets, hotel rooms, and cruise vacations for examples of industries that change their pricing constantly in a dance between value offered and market-driven demand.

Collecting data on your customer’s buying habits is critical to price adjustments, whether done as a one-time change or continuously as a dynamic model in response to demand. Having an understanding of everything from average shopping card sizes, to customer lifetime value is critical when considering adjustments to pricing. Finally, how you communicate value when making price adjustments is of great importance to your business and your customers; be clear and transparent that price changes are occurring, let your customers know when the change will occur, communicate why you are adjusting prices, and help them to understand the value that is being delivered and how you justify the price you are asking.

Photo: Dave Fayram

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