Entrepreneurs often set their prices too low, and it can take years to get them to the right level. So how do we increase our prices without losing customers?
By David Madié, founder and CEO of GrowthWheel International Inc.
When we as entrepreneurs are not making enough money it may be because we are not setting the right prices. Generally, we are good at producing and delivering products. However, it is just as important to be good at running a business and getting properly paid for our work. So to run a sustainable business and get the most from it, somewhere along the way we need to learn how to become a good salesman or saleswoman. How do we go about this?
Why are our prices too low?
There are various reasons why we set our prices too low. A frequent “beginners mistake” is that we think we make enough money. We often forget about all the less predictable expenses in the budget or we underestimate how much time we spend on each task. Perhaps we forget that it is not enough to get a decent salary. The company needs to make its “own” money to be able to invest in product development, marketing etc. To tell the company’s earnings from our personal income may be the first step towards setting the right prices.
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Written by Dora Cheatham, Program Manager, Emerging Enterprise Center
“Any color-so long as it’s black.” Why Henry Ford’s famous quote is no longer relevant.
When we utter Ford’s words today, they are often said in jest. Ford lived in a time of limited competition and his goal was straightforward: minimize costs through mass production. And the consumer was more than happy with the deal. Today’s consumer is different: he wants choice, lots of it, and with the proliferation of brands and channels, it’s there for the taking. Whether you are a business or non-profit organization, selling a product or a service, by segmenting your market and customers into groups with similar needs and buying criteria, then adjusting your marketing mix to meet the needs of each group, you enhance
THE 5 CRITERIA FOR EFFECTIVE SEGMENTATION
HOMOGENOUS—the needs within each segment should be homogeneous within the segment and different from the other segments.
IDENTIFIABLE– the customers within the segment must be identifiable and specific.
PROFITABLE—The more segments identified, the greater the opportunity to offer a targeted high value offer. However, the number of segments identified should be balanced against the cost to serve those segments.
ACCESSIBLE—the customers in the segments should be readily accessible in order to be able to serve effectively.
ACTIONABLE—the segmentation should be such that the company can act on the segmentation to implement appropriate programs for each segment.
Once segmented, the business can then determine its business and marketing strategy on the segments themselves—their size, growth and profitability—the competition and the capabilities of the business. Which segment(s) will you focus on? Which segment(s) offer the greatest growth/profitability/maximum barriers to entry? Will your marketing mix (product, price, distribution, marketing message, processes, people) be the same for each segment or will they differ? The chart below shows the various marketing strategy options for business development based on market segmentation.
Going from supplying a product that meets basic customer expectations to contributing to a client’s organization can be hard to establish and even harder to maintain, but is an invaluable strategy for long term profitability. Keeping a customer requires the creation of a relationship of mutual trust and partnership that goes beyond supplying a quality product.
Seeking to create value and a sustainable competitive advantage is increasingly difficult in today’s data-filled environment. Buyers today are educated and savvy. In the B2B world, the buyer can be 60-65% through the purchase process before he or she even makes contact with an incumbent or potential vendor. They know what’s out there and what it costs so if all you have to offer is a product that meets specifications, then you have effectively created a situation where your only option is to sell on price—and the lowest price invariably wins. That also means that as soon as a competitor emerges with the same option at a lower price, then chances are that customer is lost to the newcomer. So how can you ensure that your customer remains loyal to your product and business?
Smart Buyers Seek Value
A truly smart buyer understands the value of a vendor that contributes to the smooth running of his or her business. If you can deliver a flawless product, on-time, every time, with excellent customer service, then it behoves him to use your product—because spending time dealing with vendor-related problems and quality issues costs money and impacts his own customer service and bottom line (think about the UPS “I’m happy” ads where department managers and customers are happy thanks to UPS Logistics).
By supplying a quality product with excellent customer service you have already established some level of competitive advantage. And many companies today provide good products with good service – it is a prerequisite to staying in business. To sustain that advantage however you need to continually climb the value pyramid and add to your product in terms of additional service and knowledge, eventually making a quantum leap to the peak of the value pyramid to establish yourself as more than a vendor, but a trusted strategic partner.
Can you help lower your customers’ costs or improve their productivity? Can you help them identify new products or markets? At an even broader level, can your customers call on you for advice on operational systems and processes or strategic direction? In other words, does your customer consider you a supplier or a partner?
Schematic adapted from Doyle P. and Stern P., Marketing Management & Strategy, 4th ed., Prentice Hall
As you climb the value pyramid, commoditization decreases and company and product value increases, with fewer competitors able to compete at the same level. The fundamental difference between the lower and upper levels of the pyramid is distinct: to be good at the former, the salesperson and business needs to have a top quality product to sell and needs to understand his product and his own business well.
To be good at the latter, the salesperson and business needs to have an understanding not only of his own product and business, but of his customer’s business as well. He needs to understand his customer’s individual and industry needs and must excel at consultative selling, offering solutions that are of mutual benefit to both organizations. Only then can you hope to ensure an enduring partnership and long term rewards.
You don’t close a sale; you open a relationship if you want to build a long-term, successful enterprise. Patricia Fripp.
