Capitalism says supply and demand set price.
But that only works if everyone knows about a product or service.
The concept is rather simple: A company should set a price that maximizes profits.
That means, in a perfect world, the company would sell to someone willing to pay $200 for $200, but if someone is only willing to go to $199, the company sells to them at that ceiling and so forth on down until the company would lose money on the transaction.
“It sounds great, and that’s certainly a worthy pursuit, but there’s two problems with that,” Gunner Technology CEO, Cody Swann said. “First, not everyone is going to know about your product or service. There’s going to be people out there willing to pay $200 who just don’t know you exist. Second, you’re going to make the customers who paid $200 really unhappy if you lower your price to $199 or lower to accommodate other customers and clients.”
Companies use a number of tactics to address these problems.
Discounts such as coupons are a popular method as are referral credits and loyalty rewards.
“Car dealerships have perfected this,” Swann said. “They have discounts for everything. They don’t actually change the ‘base price’ but in negotiations, they’ll keep heaping on discounts.”
The difference, Swann said, is that, unlike car dealerships, companies should offer transparent pricing and discount models.
“You’re not a used car salesman,” Swann said. “This isn’t ‘Let’s Make a Deal.’ What you’re doing is saying ‘If you’re willing to help us, we’ll help you with discounts.'”
For example, if the client is willing to extend the project timeline from a month to three months, that should earn a discount.
If the client is willing to refer 10 people, that should earn a discount.
If the client is willing to accept a more aggressive payment schedule, that should earn a discount.
“We actually offer all prospects and clients an interactive pricing spread sheet,” Swann said. “This has our fixed base price, but allows the client to adjust other stuff, like timeline, number of resources, payment schedule and more. They immediately see the tradeoffs and can choose the plan that best works for them.”
This option model allows companies to be flexible without haggling over their base price, which should rarely change and when it does, it should usually go higher.
“Think about it,” Swann said. “If you’re a service company, you should get better at what you do as time goes on. That experience and improvement should be reflected in your price. What you don’t want to do is raise costs willy nilly or because your costs go up. Raising costs don’t mean anything to your clients, so you shouldn’t pass it on to them if there’s no increase in value.”
Getting to that original base price can be a bit of an art and a science.
Business owners and CEOs should do their due diligence to get that original price as “right” as possible.
“Competitive research is a big one,” Swann said. “What are your competitors charging? Also, ask people in your market informally view surveys and focus groups ‘What would you pay for this type of product/service?'”
In the case of a service industry, that base price is generally the company’s hourly rate.
“You don’t want projects at an hourly rate,” Swann said. “It’s a pain in the butt. This is why the discounts are so crucial. You want to move your clients to a project or retainer rate which will earn them lower prices and remove a lot of headaches and uncertainty from you off an hourly rate.”