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Andrew Penny, May 28 2019

The 5 Golden Rules of Pricing

An area that people get wrong all the time is pricing. Some people price high based on the profits they hope to achieve. Some base it on some sort of average industry “cost plus” rule.  Some are afraid to charge too much. Still others simply add a few percent to last year’s price. So before you set your next price or quote your next deal here are Andrew’s 5 Golden Rules for pricing.

1.    Cost.   You have to know your costs. Cost includes everything you pay to deliver the value to your clients;  delivery, installation overhead, marketing, commissions, cost of materials , financing etc. In most cases - but not necessarily all - you’ll want to price your product above your cost.  With your costs understood you’re well on your way but please don’t simply add a fixed percentage. Sure it’s easy “cost plus 30%” but you could be leaving a lot of margin on the table.  Read on.                

                     POP QUIZ: Cost + 30% = 30% margin.      Is that right or wrong?     The answer is below 

2.   Value.  This may be a bit trickier, but you need to know what value your customers will derive from the product or service you are providing. Take the example of a person dying of thirst in the desert. If they value their life, they’d pay everything they have for a glass of water.  

3.   Affordability.   If you were to charge more for that glass of water than the dehydrated desert traveler happened to have, the deal could not be done – no matter how much they wanted it. If they can’t afford it, they can’t buy it.  

4.   Comparisons.   People want to make sure that the price is reasonable. If someone else is selling exactly the same product and service, the lower price wins. However, it is almost impossible to sell exactly the same product. Maybe your packaging is different. The customer might like one sales rep more than another. Yours is delivered by courier and the other one is sent by carrier pigeon. No matter what, people will always compare, and to buy from you they will need to be able to rationalize the delta (plus orminus).  When selling, you can help by suggesting what they might compare your offering to. (We call this reframing (this is how you sell luxury goods like houses, apartments, cars, and so forth).                

Or if you work better with equations:      

You can watch a video version of this Blog here.

POP QUIZ ANSWER:  

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Andrew Penny

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