Why You Should Differentiate Your Pricing and How to Do It
30 second summary:
Many companies, when facing difficulty in attracting new business, often start by reducing their prices. However, contrary to common belief, people don’t buy on price, so this strategy very rarely works.
In this article, Jim Rathbone discusses how to, instead of lowering, differentiate your pricing and the benefits of doing so.
One of the first things that businesses do, when faced with either a tough economy or when they have difficulty in attracting customers is to reduce prices.
This can be very dangerous. It is vital to understand that most companies do NOT buy on price. The widespread belief that everybody is looking for the cheapest version of everything is simply not true. If this were the case, everybody would live in the cheapest houses, drive the cheapest cars, wear the cheapest clothes and have the cheapest holidays.
The real reason that customers are not buying from you is probably not related to your prices. It’s far more likely to be that you haven’t given them a clear understanding of the benefits they will experience when they do business with you or you have not given them a compelling reason for buying from you versus the competition. Achieving this is what marketing is all about.
There is another reason to do everything possible to avoid lowering your prices. Even if it increases your sales now, have you really increased your overall margin? Moreover, it will make it very difficult for you to charge the prices that you deserve in the future.
Work instead at differentiating your pricing based on customer type, volume, product type, and market. Pricing has such a major impact on business profit and it is worth becoming really competent in this area. A small improvement can make a significant difference.
Most businesses base their pricing on cost + mark up and not on the value they bring their customers and their position versus the competition. There is big money on the table when it comes to pricing.
Action Point:
Decide which areas you will test with a price increase by differentiating your pricing.
I am convinced that most businesses can improve their net profit % by 2 to 3 percentage points by using effective price management and differentiation. For a company with sales of £2m this can be an additional £40-60k net profit.
If you would like a fresh perspective on your pricing policies, send us an email at info@rathboneresults.com or ring 020 8798 0175.
Jim Rathbone
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