by Randall CraigFiled in: Blog, Business Development, Make It Happen Tipsheet, MarketingTagged as: Marketing Strategy, Purchasing
If you are a service provider, how do you set your price? And if you are a buyer, how do you know whether the price that you are given is reasonable? Beyond the obvious, price itself is an indicator of a number of factors: value, credibility of the service provider, work effort on the project, and risk.
While some may say that pricing is an “art”, it isn’t: it is bound by three specific factors:
1) Cost of delivery: Beyond the cost of labor, there must be sufficient margin to pay for staff training, technology, rent, and all of the other overheads involved in running a business. If these aren’t covered, the business will eventually become unsustainable. What to look out for:
2) Competitive dynamic: Setting prices too high usually results in disqualification. Setting prices too low breeds suspicion: has the work effort been estimated properly? While it may seem that this factor might not apply when there is no competition (eg for a unique service or a monopoly) there is always competition: the project can be executed internally, or it can be shelved.
3) Budget: If the budget is lower than the price, then the cost of delivery and competitive dynamic make no difference – there won’t be a deal. What to look out for:
If you are a buyer, this week look at your procurement process from your service provider’s perspective: how does your process influence pricing? And do you provide budget guidelines? If you are a service provider, this week look at your pricing process: when was the last time it was updated?
Marketing Insight: Price is also an indicator of risk. A low price typically means less work effort, more junior staff, and higher risk. Price is also an indicator of brand equity, which, again, is connected to quality, assurance, and risk. Build your brand, and it is easier to justify a higher price, notwithstanding the cost of delivery, competitive dynamic, and the budget.
Marketing Insight #2: The best buyers understand that price is only one factor: experience, references, availability, and terms and conditions are all part of the equation. How do you compare on these, relative to your competition?
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