Over the years, I've conducted close to 80 public or in-house pricing workshops, all over the world. The general, consensus from attendees at the end of the program, whether it ran for three hours or three days, is usually something along the lines of "Wow, I didn't realise there was so much involved in Pricing!"
It should come as no surprise therefore, that being asked to write only 350 - 500 words for Small and Medium -sized Enterprises (SME's) on "the basics of pricing" is a formidable task, but one I will attempt to do by sharing just two simple rules of Pricing.
Rule Number One: Value is Subjective
Ask one person why they have private health insurance and she might tell you "...for piece of mind". Another might tell you "...to get out of the public health system", and a third might say something like "...to get back to work or home quicker".
These responses illustrate that all value is subjective. Yes, you can talk to them about features and benefits, but ultimately, value is in the eyes of the customer. So what are the implications of this for your pricing strategy?
Firstly, value is what customers are buying. They don't care about your costs. So the best way to increase prices is to increase value (and vice versa for decreasing prices), and not try to defend your price increase on the basis of the latest CPI figures.
Secondly, because value differs, between customers, so can (and should) your pricing. While one-on-one pricing may be "marketing nirvana", at a minimum there will be groupings of customers who see similar or identical sources of value in your product. They are called "customer segments", and rather than just giving them a warm and fuzzy name, develop actionable strategies towards these segments, whether it be targeted mail-outs or segment-specific pricing.
Rule Number Two: All Pricing is Contextual
If you're feeling downhearted after reading Rule #1, and learning you're not in control of this concept of value, the good news is that Rule #2 provides a solution, or at least some good assistance. You can shape perceptions of value by adjusting the context in which your pricing occurs. Let's look at some specific examples of this, which may be easily applied to your pricing strategy.
Why do customers pay more for an ice cold beer purchased from a five star hotel at one end of a beach, and less when the identical beer is purchased from a run down grocery store at the other end of the beach? Because the context in which the price is paid is different. Sure, the hotel can compete on price with the grocery store. But they will be leaving money on the table, and if you can win a customer on price, you can also loose a customer on price.
The $800 bottle of wine on a restaurant wine list also provides context: it's there to make the $80 bottle of wine look like really good value for money, and the one the restaurant really wants you to buy.
But don't stop there. Always try to offer customers three choices, the technical pricing term for which is "goldilocks pricing". Give the customer one choice, and you've got a 50:50 chance of winning the business. Give them two choices, and you are forcing them to make a price-based decision. But give a customer three choices, then firstly, the question they ask themselves is "which one do I buy?", not "should I buy from this vendor?" and secondly, you are forcing them to make a value-based decision (not a price-based one).