There’s nothing wrong with Cost-plus or Value-based pricing when they are done right. Both are good strategies but incomplete in my opinion.
In the case of Cost-based pricing, basically you look at the costs and then add a percentage for profit on top of that number to arrive at a price.
In my experience, those who set the prices don’t know, forget, or leave out costs that they shouldn’t. Sometimes it is the cost of the salary of the principals or putting in enough for contingencies. Just as often they don’t include all the costs involved in being able to provide this product or service before and after getting customer #1. Then there are the true total costs to support and maintain this customer with this product or service.
Business owners who set or agree to the prices based on costs get overwhelmed and under-price. I have a client who is launching a new product and thought it had cost about $10,000. Once we did the numbers (we did not include lost opportunity costs but real numbers), it was closer to $55,000. It was not even launched yet.
I think Value-based pricing is a better strategy. It incorporates the costs and the value this product or service provides the customer. If all the true total costs are accounted for, then determining what the customer gets out of it, should be relatively simple. Market research, competitive analysis, and usability testing gives you a place to start.
It does depend on identifying the right value for the customer. What most people who use this technique to arrive at pricing don’t do is spend enough time on identifying the best customer, the most loyal customer who brings the most value to the business.
However, a strategy that does more because it goes beyond both is a new concept, “Legacy Pricing”™. It doesn’t just look at the past or the present, but really focuses on the future. The future of the company is its legacy and it’s too often forgotten or glossed over when it comes to pricing. Without a legacy, nothing goes beyond day-to-day and the value of the business is reduced even if it survives.
Legacy Pricing™ is a better choice for these times because it’s more complete. It includes cost and value. It includes profit and contingency. It deals with value identification, but it also takes pricing and relates it to a timeline in a meaningful way. The timeline for pricing should make sure the business shows it will maintain its value down the road for any subsequent transfer or expansion.
Using Legacy Pricing™ means using other best practices.
- Price for your legacy customer, using what I call a Platinum Profile™ .
The latest research suggests that about 15% of your customers account for 55-70% of your total sales. Price to keep loyal customers not just any customer and not just to get people calling or coming in the door. My platinum profile™ system lets you really know who to focus on and who to eliminate. It includes demographics, psychographics, risk tolerance, decision-making style, purchase behavior, and the “game” they play. Price for them and you won’t leave money on the table and you won’t exceed their “pricing flinch point”™. (The point at which you can see a physical reaction to the price you name.)
- Price for positioning, now and in the future.
Don’t forget where you’re going and who you want to go with you. One of the biggest dangers of discounts, coupons, etc. is that it ruins the positioning that you have established. No longer are your products and services the best, Why do customers feel like that? Because the best products provide the extra quality and value that takes time and effort. If there’s not enough time to provide this or enough quality staff, then your customers will see you as just “one of the group”. And, worse, not worth they loyalty to you. There is one universal truth: you can’t “steal” a happy customer. Loyalty and feeling special makes them feel like they belong and they will stay.
- Make sure the right person does the pricing and determines any exceptions.
If you have to do the pricing, have someone other than you review it. If you have partners or staff or hate dealing with pricing, have all those who work with the product or service give you input. Then do your market research based on that legacy customer and re-check your numbers. See if it will support the positioning you have and the positioning you want to maintain. Finally, it’s better to still get someone not connected with your business to review what you’ve done and ask the hard questions.
I am proud to be the inaugural speaker for the new San Antonio Business Owners Meetup sponsored by the Business Bank of Texas. I will be talking more about legacy pricing and how to make sure you have a future. The meeting will be held Thursday, July 20, at Pappadeaux Seafood Kitchen, 76 Northeast Loop 410, San Antonio, TX. For more information or to register to attend, please go to http://www.meetup.com/The-San-Antonio-Business-Group/. I hope to see you there and get your insights into the best practices you are using for pricing.
If you have questions about your pricing or comments about legacy pricing™, please comment below.