Pricing. It isn’t glamorous, but without this skill, your business will suffer. If you master it, you will have more customers, they will stay with you longer, and your family and friends will wonder how your stress disappeared.
It is more exciting to talk about strategy, or our products, or how great our services are. We often find ourselves working on building the next great sales funnel, or social marketing, or blogging. Too often, we lament that our great products and our incredible services are not selling like we know they should be.
On the other hand, pricing seems mundane, boring, and a bit mysterious. Often, we just pick a price and start trying to sell. If sales don’t roll in, we try to change the price. If that doesn’t work, we start scratching our heads.
How did I discover the link between pricing and everything else in a business?
Over a decade ago I started selling consulting services. I wanted to build a base of customers to grow a stable income and then expand. So, I did free consultations and then offered an inexpensive price for a package. What I found is that it was hard to sell, even when the price was below market value. When I did sell, the clients I worked with were very demanding, frequently missed sessions, and were a headache.
I decided to try something different. I’d read about perceived value in Cialdini’s book about influence. I wondered if I wasn’t selling to the customers I wanted to attract because of the low price. Perhaps, they didn’t know how to appraise my service, and they subconsciously relied on the price to help them determine the quality. Because the price was low, I wondered if I seemed to be selling low quality consulting. So, I raised my prices by 300% (yes, they were that low), to a level that I felt I was worth based upon the outcomes I delivered to clients. Overnight, my sales soared.
Naturally, this made me curious. When I got my MBA, I picked a school known for marketing (Duke University) and took every class on marketing, strategy, and modeling. I found that pricing made an appearance in most of the subjects. It seemed to be the center of the business universe.
Earlier in my career, I was an officer in the USMC. Part of the training program for Marine Officers is a six-month course that is fundamentally a leadership and infantry training school. During that six months, we spent more time on patrolling than any other subject. I asked an instructor about this, and the answer stuck with me. He told me that the staff analyzed skills that officers needed in any job, and a sizable percentage of those skills were required to run a successful patrol. Leadership, planning, navigation, movement, coordination, communication, team-building, thinking on the fly, etc. are all needed in patrolling. I went on to fly KC-130s and all of those skills translated into the flying world.
Pricing is patrolling for small businesses!
Pricing is the business equivalent of patrolling. Once you learn how to price accurately and reliably, you can build fabulous sales funnels; sales go up, customer retention increases, your strategy is more reliable, you can measure and predict accurately, you know what your customers want, and you can budget with confidence.
Let’s look at a typical small business and how it flows and where pricing can make a difference. We start by having some big goals in mind (strategic goals), and then we craft a plan to reach those goals. You may do this informally, but the flow is the same. Then we sell. I’ve broken selling into three steps; create products/services (if they are new), build a sales funnel, and execute. Then we measure the results, make improvements, and continue.
How does pricing become the element that makes everything else work? I’ll use my WRAP Pricing Framework to illustrate the connections.
WRAP stands for:
5Ws – this step enables us to understand our products and services from our customers’ perspective and prepares your marketing by making the message clear and defining your market.
Research – after you know more about your product and your market, you learn about your competitors, costs to deliver to your customers, and fine-tune your marketing copy.
Analyze – now you take what you have learned and digest it. Match the problem with the particular problem that it solves. Pair the solution to the right group of people who need it. Refine your knowledge and get very clear on value.
Prove – until now; you have made some best guesses. Its time to test your beliefs with your customers. You test in small batches and improve your knowledge, price, and message until you know you have it right.
How does this make pricing the center of the small business universe? Let’s look at the process steps I show in the graphic above and see how the puzzle fits together.
Strategy – when you price accurately it is much easier to set your strategy in place. You will know what markets you can sell to, what products and services deliver the most value to your clients (and the most profit to you), and you can decide to add more products to the mix.
Plan – when you have great information and insight about your market, competitors, price, costs, etc. you can create programs that make sense and aren’t just a guess.
How exactly does pricing link to the rest of the business flow?
Creating Products and Services – using the WRAP model while you are creating your offerings means that you will be building something that will sell. You won’t create something and then hope it sells. Instead, you’ll gather information and test it to guarantee that you develop solutions that have an audience.
Sales Funnels – it is nearly impossible to create a funnel if you don’t know the product/service inside and out. But, when you have this knowledge in hand, it is easy to assemble high-performing funnels. You’ll know precisely who the targeted customers are, their location, price, pricing levels and so on.
Measure Results – the WRAP framework requires you to know your costs. How much does it cost to create and deliver your solution? When you know the answer to this, your financial picture is bright. You can offer discounts, compare profit to customer acquisition costs, know how much you can spend to acquire a customer, understand the lifetime value of your clients and make fiscally savvy decisions.
Improve – when your results aren’t what you hoped, you can quickly improve because the problems will be evident. You’ll also spot areas you can improve to make high-selling products even more profitable.
Shiny object syndrome plagues all of us that start or own businesses. We wear many different hats. We run the company, are in charge of marketing, interact with customers, try to build sales funnels, and so on. On our quest to learn more and become more skilled, we get distracted by the next “shiny” solution that floats by on the Internet. In the end, we’ve typically just wasted time and money. I’ve found that one of the reasons we suffer from this malady so often is that we don’t know where to start. We start a business because we have a great solution to a problem and then build a business around that idea. Then we find out just how much goes into being a small business owner!
Pricing is my response to this issue. If you get good at pricing, which isn’t hard to do, many other pieces of your business will fit neatly into place. I’ve shared the framework I use for pricing, the WRAP Pricing Framework. It is easy enough that anybody can follow it and master it with a bit of practice. Click here to read that article. If you would like to download a free copy of the framework, click here.