I’m going to start by sharing a story…you may well have heard it and it most definitely isn’t true. But it’s such a neat introduction to what I want to say, that I have to include it.
A very expensive freight ship’s engine failed – no one in the company could fix it, so the ship was out of action, losing £000s every day.
Eventually, the company brought in an engineer with years of experience and detailed knowledge of that particular engine and asked him if he could fix it.
The engineer inspected the engine for 10 minutes. He then reached into his toolbox and pulled out a small hammer. He tapped the engine which lurched into life. Fixed!
The CEO and CFO were delighted – now they could continue with business and begin generating revenue again.
A week later they received the engineer’s bill – for £10,000. Immediately they got on the ‘phone to him.
“What are you thinking, sending us a bill for £10,000. You were only here for 10 minutes – you hardly did anything. Send us an itemised bill so we can see the breakdown.”
A week later they received an itemised bill. It said;
- Tapping with a hammer: £2
- Knowing where to tap: £9,998
The 4 Ps of Pricing
But your price point is more than an opportunity to demonstrate your value.
Price affects your business in 4 ways.
And in ways you may not have considered.
The obvious one. The relationship between your cost price and selling price will determine your profit, both through margin per sale and total profit. Low margin, lower price, high turnover….or higher margin, higher price, lower turnover. Whatever your strategy, your profit is inextricably linked to pricing.
But pricing has a much broader impact than just the bottom line. It also affects…
Pricing is part of your brand image. Where your product or service sits, compared to the rest of the market, will affect how people perceive it…and so what they expect.
Think about how your expectations differ from a stay at a Premier Inn versus a stay at Claridges. Both are offering you a room with a bed – but you’ll expect more from your Claridges stay.
Customer dissatisfaction comes when the price paid is not matched by the experience. And this is as relevant for underpricing as it is for overpricing…charge too little and you’ll be perceived as too cheap to be of any value.
So price drives brand perception which in turn influences the next P…
Your pricing will impact who you attract as customersIf you’re priced at the low end of the market you’ll appeal to value seekers. And that’s fine, as long as it sits comfortably with the rest of your brand image.
Price your product at the higher end and you’ll appeal to buyers who get reassurance from price (remember the Stella Artois strapline – “reassuringly expensive”?) They’ll expect more than the basics, and if you don’t deliver, you’ll have disappointed customers.
And that can be linked to the final P…
What you charge will affect what you can offer
Take two airlines. Easyjet sell on price and offer a basic service. They aim to be the cheapest and so all their focus goes into cost saving – not into extras*. Etihad sell on service and comfort and on some of their flights offer an on-board nanny to help with child care.
Two different packages, two different pricing strategies.
So the price you charge determines the package you can offer. And this will impact your brand image
And there’s the 4Ps
Pricing isn’t easy, but it is essential – to more than your bottom line. It deserves your attention and it demonstrates your value.
*After an unfortunate skiing accident I had to return to the UK in a full leg cast, be put onto the plane via the hoist because I couldn’t get up the stairs and then had to sit across three seats. When I asked for a pillow, I was told “we don’t carry them, we’re a no-frills airline”. The service was in keeping with the ticket price – and with my perception and expectation. But it was a long and uncomfortable flight home.