Are you charging too little for your product/service?

How to generate more revenue without finding more customers

All business owners perpetually occupy their minds with ways to expand and grow their business. In truth, although there might seem that there are an infinite number of ways to do this, there are essentially only three ways one can increase the revenue of one’s business.

One can:

  1. Sell more of one’s product (increase sales volumes)
  2. Sell more stuff  (increase one’s product basket / diversify)
  3. Charge a higher price for your product (implement price increases)

The incredible thing is that by far the easiest of the above options to successfully implement is number 3 but most of us spend most of our time trying to figure out (1) and (2).

Why is this the case? Well, most of us assume, without doubt, that our product pricing is currently correct and increasing the price will result in a loss of customers whilst decreasing the price won’t necessarily bring us greater volumes.

But how many of us have actually tested if the above pricing hypothesis is correct? From my experience less than 1% of businesses have actually conducted a true pricing test and 99% of companies price their products and services based on one of the two pricing methodologies:

Pricing Strategy #1: Cost Plus Pricing:

In the old days before the internet and before information was at everyone’s fingertips people used to price their product by simply adding a margin (say 25%/50%) onto the cost of their product to get to their final selling point. The reason why this is no longer an effective or an efficient way to price one’s product is:

  • The cost of your product has no relation to the value which your product provides to the customer
  • Services (which involve man-hours) are hard to quantify and price.

Pricing Strategy #2: Competitive Pricing:

Competitive pricing is the most common form of pricing strategy used. In a nutshell it involves looking at what the market charges for your product or service and pricing your product in the same ballpark (slightly more/slightly less/ or the same). There are two reasons why you DON’T need to price your product the same as your competitors:

  1. Your customers don’t have close to the same understanding of the market and the related prices as you do. It is often more important to be found first rather than to be the cheapest option.
  2. Only commodities need to compete on pricing. To price your product the same as your competitors essentially communicates the fact that there is very little difference between your two products. Mercedes and Kia both sell cars to take you from A to B, but Mercedes of course sell based on the extra value that their cars provide (because of their extra features and greater quality). Most products and services can offer great value or even frame their offering in a way which is perceived to offer greater value and therefore charge a higher price.

The Alternative? – Value-based Pricing

Hands down The best way to price one’s product is based on the value that it provides. It is actually the most obvious way and, yet it is the least used pricing method. Value-based pricing essentially entails pricing your product at what it is worth to your customer. Makes sense right? Charge customers what they feel your product is worth…The question is how do you know what that magic number is. Well the only way to know this, is to test it. Whenever we launch a product we always run a Facebook test where we show our product or service to similar but different audiences at different prices and then analyse their response. Below is a test which we ran in our coffee business Aquaspresso.

Overview: We launched a domestic coffee machine for rental and we wanted to see how much our customers valued it at. We couldn’t go less than R500 p/m as this was essentially our cost price.

Test 1: We started showing the following Ad with the base price of R590. After running it for a month we received X number of leads and from these leads we converted x/3 of these leads into sales.

R590

Test 2: We then changed ONLY the price in the Ad from R590 to R690. After running it for a month we received almost exactly the same number of leads and converted these leads again into x/3 sales or customers. Overnight our new price became R690 as we learnt that our customers valued our offering at R690 just as much as they valued it at R590.

R690

Test 3: We kept on going! We then changed ONLY the price AGAIN in the Ad from R690 to R790. After running it for a month we received 1/5 of the number of leads as we did previously and even fewer sales as a percentage. We discovered that our customers no longer saw value in our offering.

R790

That’s how we determined that our price needed to be R690 as that was the value that the maximum number of customers saw in our product.

Conclusion:

Finding a way to generate more leads or trying to discover which new product to sell to your current customers are both great ways to improve and grow your business. Optimizing pricing, on the other hand, is the simplest and quickest one thing we can all do to improve the state of our business almost over night.

Growing a business is incredibly difficult but often the simplest solutions work best to solve the most complex problems.