A furniture manufacturer raises its prices by 20%, but then sales fall by 20%. Did the business make more or less profit?
The unschooled might say it remained the same, but of course it didn’t – if you increase 100 by 20%, you get 120. Reduce 120 by 20% and you get 96. 20% of the larger number is, of course, always going to be a larger amount.
OK, Key Stage 2 maths lesson over. Let’s get on to marketing. The real lesson is that changing your price can have a significant impact on your sales – but not necessarily in such a straightforward way as my daughter’s homework. Apple charges a considerable premium for an iPad compared to similarly specced Android tablets, but this doesn’t reduce its sales. In fact, the high (or some might say, inflated) price of an iPad contributes to the overall brand identity. Apple doesn’t make cheap kit. They are not a cut price brand.
The traditional approach to price was to base it on cost-plus: work out how much something costs to produce/deliver, then add on a standard margin and, hey presto, you have a price. The Ministry of Defence still works on that basis, which is perhaps why it has a black hole of tens of billions of pounds in its budget. A more sophisticated way is to price based on a combination of the perceived benefit to the customer, the positioning of the brand, or the overall cost of ownership to the consumer.
When you set a price, what does it actually cost your customer? Are there other costs which need to be considered (such as maintenance costs or consumables)? Printer manufacturers price their printers low (sometimes ridiculously low) in the hope that they will recoup their money from the ongoing (inflated) cost of cartridges. This approach falls down when people buy unbranded cartridges or decide to refill the cartridges themselves with a syringe kit and two entire packs of kitchen roll. Conversely, your product or service may incorporate a host of features and benefits which you are undervaluing. A car salesmen might concentrate on a car’s bells and whistles, but the deprecation rates for that particular brand are going to have a far greater impact on the consumer if they are purchasing outright rather than leasing.
It is tempting to think that price needs to match or be lower than the competition. Nearly every electrical retailer seems to offer a ‘price match guarantee’ these days. But competing on price can be a zero sum game where everybody’s profits are hit. Could you not emphasise your quality, durability or exclusivity compared to the competition and thus justify a price premium?
In summary, pricing strategy can be complex. Consider getting outside advice from a marketing agency!