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9th Aug 2014
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What price? How do we price something when we don't know which method to use and at the very least: don’t even have a pricing policy? This is a question my clients ask me when determining a price. If we get the price wrong - the result could be disastrous. They'll be no come-backs or referrals; worse still our price could end up in a loss making exercise. Essentially, the mood now is to move away from hourly rate into value-based pricing. It is typically highly competitive as price can differentiate a great deal between different organisations when tendering for the same job. It has merit: the price is known upfront and providing all runs smoothly, the customer knows what to expect at the end when the deal is done. But is it acceptable, is it justified? Do we avoid disgruntling our clients? Does it give us a return? Some of these questions need careful consideration before price is agreed. So what considerations are there?

Marginal pricing – basically, cost plus profit. This is appropriate when demand is high and very little competition. If it’s a case of ‘I can get it cheaper somewhere else', and they eventually move to grasses greener, then fixed costs may not entirely be covered by contribution. This then has consequential effects on targets which in turn can have a devastating effect on net profit. Caution is needed, never use this too long when full costs are not covered as news soon spreads and the temptation is to sacrifice price and merge more profitable ones into those loss-makers.

Perceived value pricing – what the customer thinks it is worth; the market’s going rate; what you can get away with. We’re familiar with Jo Bloggs coming through the door and saying ‘my mates are paying less', for a standard type of job. We either buckle up or take the hit – your choice. But too many of these can have a detrimental effect on morale if not harnessed because you're not putting bread on the table by taking a fall in fees.

Skimming – this is more common under the introduction of say a new government policy that demands highly resourced professionals who know their stuff and produce the required results. They earn their meal ticket easily and more profitably and the customer wants to pay. And in some cases customers will only pay the price because the price is high. But it’s not ever-lasting. The copycats soon saturate the market with lower prices and demand eventually falls.

Penetration – dangerous but daring. Capture the whole market by under-cutting your competitors by 50-75% and you’ll have customers running to your door. A job with a perceived value is under-cut by several hundreds or thousands of pounds; this of course is not sustainable unless you have a very low labour-cost base such as Asia. It depends on how resilient or fearless you are. Competitors are kept at bay.

Bidding – some prices may go out to tender and it’s not always the lowest bidder that wins. It’s all according to the way it’s presented and packaged and the resources needed to carry out the project. Local councils are keen to accept this method of pricing. Common now are the auction sites. Price is driven by market intelligence. Each seller counteracts the other usually on a fixed price basis so as to win. This produces high volume but low margins but can have its rewards providing it is volume-driven. The customer is not dazzled with impressive receptions and glitzy glamour; they want the job done but at a certain price.

Discount pricing -at the very end of the process when the customer has received value and price has already been agreed. It's sometimes more economic to offer a discount if the account is paid within a specific period of time. The overall effect of this will have a direct hit on cash-flow and the company's cash resources. Machiavellian tactics can sometime be used here if the discount is added-on to price beforehand.

Promotional pricing - this happens when stocks are high or end of line. Other times are when setting-up a new business and you need to promote yourself: make a presence. Discounting agents and voucher systems are popular. Demand increases but dwindles when the price goes up; only because they're waiting for others to offer similar deals. They are only a temporary pain killer and should not be used consistently too long.

Prices are subject to change either through inflation or increasing costs. Reviewing prices on a regular basis keeps you ahead of the game and in it for longer. If you have high volume sales; rising costs can sometimes be absorbed in current price. It's simply a matter of profitability. ALLEN D LUNN


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