As a business owner, your pricing policy is a key profitability lever. It’s also a survival tactic. A 2% or 3% increase on your pricing has a dramatic impact on your profit before tax and should be considered as inf lationary climates darken our business horizon.
Three traditional pricing strategies govern how you build your business.
There is also the Middle Eastern pricing model which, as a former trader of goods, I came to learn during the early Nineties. Sounds simple doesn’t it? You figure out your cost of product, add a mark-up and your pricing is done. Yet I often see incorrect costs being calculated as the basis for this model, especially in services businesses where your cost is often a complicated agglomeration of time and skill.
Accurately accounting for time and skill requires a well-functioning backoffice, something few business owners have at hand. Learn to love it, outsource elements of it if you are bad at it and demand timeous, accurate and reliable accounting data or pay the consequences of wrong pricing. You cannot out-price yourself from the market. So the pricing opportunity here is one of differentiation. Can you set yourself apart from your competitors?
Please don’t believe service and care are differentiators to justify pricing! I think that there is a more important factor at play with competitor pricing and that’s attitude. Obsessing about your competitors really interferes with building your own business. Keep an eye on them for sure, but sail your own ship and use customers as your beacons of success rather than your competitors as your measure of success. This is where you ultimately see the value of a brand being used to support your pricing. Positioning your brand as, say, a low-cost provider requires two things. First, really good advertising and brand building activity. More importantly, you must then be the low-cost provider. Your brand perception is delivered by marketing activities and will last as long as your customers’ brand experience supports it. This is delivered through your business model and that means being good, really good at the nine elements making up a business model of which marketing is only one.
In my early trading days, I actively worked and still do in the Middle East. Here I came upon a pricing model that is as old as the Euphrates. This model requires the business owner to always be present in the business and to employ predominantly family members as front-line sales staff. Each sales staff member has to know the cost price of every article in the store. It also requires that sales staff have the ability to read people remarkably well.
As a customer walks through the door, immediately and very quickly you are required to assess the customer as a cost plus ‘something’ customer! This will be determined by the ability to read you, see your hands and fingernails indicating if you are a labourer or office worker, what watch you are wearing, how well groomed or not you are and other elements that indicate your potential to be a cost plus 30% of cost plus 70% customer. All the goods are marked up to cost plus 100%, so whoever you are you will walk out with a deal.
Think and use your pricing model to build your business into an asset of value. Turn it into a pricing policy since the thinking behind your pricing strategy indicates the thinking behind your business and more importantly how you perceive your own business. I hope it is to build an asset of value!
Pavlo Phitidis is CEO of Aurik Business Accelerator, an organisation that works with business owners to grow their businesses into assets of value and a director of Aurik Enterprise Development, an organisation serving big businesses with ED solutions. He is also a regular commentator on entrepreneurship and business development on Talk Radio 702 and 567 Cape Talk.