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Pricing strategy

by Randall Craig on August 12, 2016

Filed in: Blog, Make It Happen Tipsheet, Marketing, Professional Services, Sales

Tagged as: , , ,

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:

  • Expensive offices and other signs of excess? (costs will be higher)
  • Senior staff on the engagement, vs junior staff? (costs will be higher)
  • Little investment in professional development, or reduced project scope? (costs will be lower)
  • Corners are cut (costs will be lower; more on how to avoid corner-cutting.)

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:

  • Unrealistically low budgets: To win an engagement with an unrealistically low budget, either scope must be cut or more junior staff must be used. Or, the project will end up with a greater number of “change requests” and a higher total price.
  • Very high budgets:  If the budget is higher than price, it will be harder to justify the project’s ROI.
  • No budget provided: This is a no-win situation for everyone, as some service providers will deliver a Mercedes Benz-priced proposal, others a Toyota, and others a low-end Ford.  The truth is that each service provider can deliver the engagement at all three price levels: without budget guidelines, it is impossible for the buyer to tell which is best.

This week’s action plan:   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?

Note: The Make It Happen Tipsheet is also available by email. Go to www.RandallCraig.com to register.

Randall Craig

@RandallCraig (follow me)
www.RandallCraig.com
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About 

Randall has been advising on Web and Social Strategy since 1994 when he put the Toronto Star online, the Globe and Mail's GlobeInvestor/Globefund, several financial institutions, and about 100+ other major organizations. He is the author of seven books, including the recently released "Everything Guide to Starting an Online Business", and speaks across North America on Social Media and Web Strategy. More at randallcraig.com and 108ideaspace.com.

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