Most small business owners make the subject of pricing way harder than it has to be. And the overabundance of information and theories on the topic don’t help (Search“pricing strategy” on the Internet and you get over 6.7million results).
Pricing can be straightforward – but you need the right perspective. You need to realize that pricing is really just a mechanism to communicate value.
To help you get this communication perspective on your pricing, let’s look at three type of people you meet at any party and compare their style of communicating to the three common pricing approaches small business owners use:
They are the one who stands timidly in the corner; not engaging others in conversation, not asking other people about themselves, not joining the conversation unless specifically asked, and then they only answer in quiet, shy, short and non-expansive answers.
When it comes to your pricing, the Wallflower equivalent is “pricing emulation.” This is where you base your prices on what your competitors and your market are charging, what customers expect, and so on.
This approach communicates two main things:
- That your business and its products and services are plain, boring, and the same as everyone else.
- That your customer is the one in charge. They are allowed to control the conversation, and the relationship.
Obviously, when it comes to pricing, this is NOT the communication style you want. Yet so many small business owners use this pricing technique.
The Arrogant Jerk
The arrogant jerk thinks they are the only one with worthwhile opinions and thoughts. When listening to someone else, the arrogant jerk’s eyes glaze over just waiting for them to stop talking so they can start again.
You know how annoying this type of person can be (and if you’re reading this and are thinking that you have NEVER encountered someone like this, I can almost guarantee the people you talk to have).
The pricing equivalent to the arrogant jerk is the “mathematical” (or cost plus) approach. This approach takes a look at your costs, anticipated sales volumes and target profit and then mathematically calculates the price that should be used.
When you use this method you are communicating that YOU are the most important person in the sales/purchase transaction. It communicates that YOU believe your customers and prospects should care about things like YOUR costs and YOUR desired profits.
The Amazing Conversationalist
This person listens attentively, offers their thoughts where relevant and is often lauded as being very interesting to talk to (even though they often spend more time listening than talking).
These are the people everyone seems to gather around at a party and are almost always involved in the liveliest conversation groups. This is the way you want to approach pricing in your business.
Listen to what your customers and prospects want to achieve from acquiring and using your products and services. Then ethically set your prices based on the value you bring to your target customers.
In a future article, I will explain a step-by-step process for applying the Amazing Conversationalist pricing method.
For now, your homework is to ask yourself which of these three communication styles you are currently using. Observe other businesses you encounter each day and determine which type of pricing communicator they are.
It’s fun and gives you great perspective on your pricing.
Arrogant Businessman Photo via Shutterstock
It seems like even the amazing conversationalist needs a little arrogance in order to ensure they’re profitable, but I wholeheartedly agree that pricing should be based on the value you are delivering to the customer.
You spoke the truth Robert. Yeah, having the confidence to set prices based on value does need a little bit of arrogance.
And profit is the bottom line after all (lame pun intended).
Agreed that you need a touch of arrogance, but not so much that you become immune to customer feedback. As you wrote, it’s best to be the listener.
I agree Dave.
Customer feedback is one of the best ways to figure out what customers truly value, and what they don’t. And that can be a huge advantage when setting prices that recognize the value of your products and services, from your customers’ point of view.
And that’s what being a brilliant conversationalist is about.
It’s not “arrogant” in the least to apply a mark-up that covers your direct and indirect costs and provides a fair profit. Assuming you didn’t do something stupid like rent top-end office space when you could be working out of your home, or hiring more staff than you actually need, correct mark-up over costs is the STARTING POINT for establishing your pricing, and it’s what ensures you’re going to be around to service your clients. That is, IF the market accepts your product/service as having enough value to justify the base price. And that’s the litmus test – if it doesn’t… lowering your price below what it needs to be to cover your costs isn’t going to make your offering any more valuable nor will doing that keep you in business.
[Edited by Editor]
Thanks for you comment.
Your discussion about markup is fair, but I think you missed the point I was making throughout the entire post.
The point being made is that what the business owner feels are reasonable costs don’t really have any relevance to the value perceived by customers.
Your example about top-end office space versus working out of your home is a good one to make this point.
If your target customer values a more “grassroots” look and feel to your business, then working from home may be the way to go.
On the other hand, your target customer may place a very high value on a nice office environment in which to conduct business with you.
In that case, if you as the business owner decide to avoid the nice office (that your client values) in order to work out of your home, then, yes that is an example of the Arrogant Approach to pricing.
In other words, YOU would be the one deciding what your customer values (or should value) instead of listening to what actually do value.
I really liked what you had to say here. I find myself often being the ‘wallflower’ sort of sales conversation. I hate being thought of as pushy or too expensive. So I try to keep prices around the same as my market.
I thinking that I need to find ways to tweak how we offer our services so we aren’t plain, boring or like everyone else. That way we may be able to step into] a more ‘Conversationalist’ approach.
I’ll get to work on the homework. (And I’m looking forward to the sequel to this post!)
Thanks for posting Aaron.
My next post deals with the “how to” of stepping into being a Brilliant Conversationalist when it comes to pricing.
And the REALLY good news for you is that, if you are currently pricing about the same as your market, you are poised to seriously improve your financial results once you start adopting the Brilliant Conversationalist Approach to your pricing.
Thanks again Aaron.
I find that with it being so easy to research competitors online that the ‘Wallflower’ approach seems to be the most prevalent with the lazy pricing of the ‘Arrogant Jerk’ being a close second.
I hope that more people would combine the two & LISTEN to their customers/potential customers… and become the sought after ‘Amazing Conversationalist’.
Great parallels here…
Thanks for posting Joyce.
I agree – the Wallflower and the Arrogant Jerk are the two most common approaches small business owners seem to use.
You nailed it when you say the key is to LISTEN.
You clearly “get it”. I bet your clients love you for the perspective you bring to their businesses.
Steve, you made two excellent points about pricing when you said: 1. “that pricing is really just a mechanism to communicate value.” And 2. “the value perceived by customers” is really the most important factor.
I believe the three labels you assigned to common pricing approaches created unnecessary emotional reactions that obscured your two great points. These three labels describe methods of communicating value, which can each be very effective under the right conditions, yet it appears you discouraged two methods over one. Why? Your labels themselves express strong bias. “Wallflower!” “The Arrogant Jerk!” These are not positive. Then “The Amazing Conversationalist!” Wow! How amazing!
I fully agree that getting the customers perspective is critical to understanding their perception of value, as you emphasized in the “Amazing Conversationalist”
However, there are numerous examples where business owners have used the other two methods to great successes in their pricing as well. The founders of Facebook could be considered “Wallflowers” but their products communicated and provided such great value, they did the talking for them. Steve Jobs could have been considered arrogant, especially in his pricing, because he “created excellent value perception” through the unique products he created and priced so high.
Thanks for commenting.
Perhaps the labels I used did trigger emotional responses. But generating emotion is what they are supposed to do.
I have to say, though, that your examples of Facebook and Apple are great ones. Facebook may appear to be a Wallflower, but I will play devil’s advocate and argue that they actually are more of a Brilliant Conversationalist.
They created a world-changing product, but they have always been careful to listen to their customers. For example, when customers started telling them they saw huge value in being able to advertise to people based on highly-specific interests, Facebook listened.
Steve Jobs (and as someone who is typing this response on my trusty Macbook Pro – I love this example) I don’t believe followed the Arrogant approach to pricing.
Your quote about how Apple “created excellent value perception” is what I’m going to hang my hat on when I say that he was a Brilliant Conversationalist for pricing.
He was only able to create excellent value perception by being attuned to what customers wanted from Apple, and would be willing to pay for – great design, “sexiness”, not Windows, any number of things.
But he listened intently to customers and prospects, and priced accordingly.
Exactly what the Brilliant Conversationalist Pricing Method is all about.
Morris A. Nunes
Has anybody here heard of price elasticity and maximization of aggregate gross profit? If you’re dealing with standard pricing or list prices that’s THE concept that should be embraced. If you’re pricing by the job (e.g. custom services) then there’s something to the “customer’s value” argument, but even with differentiating features (e.g. warranty, reputation, etc.) there is a threshold at which elasticity again drives business away, even if it’s just on the basis of customer affordability. For the salesperson selling per job (product or service) this is a useful article, but even in that case, the range has to be bounded by management on the lower end by a cost-of-capital based return and on the upper end by the concept of elasticity and aggregate profit. For further info, please see the last Chapter of my book, BALANCE SHEET MANAGEMENT, available through Beard Books or Amazon.
Thanks for your comments Morris.
But I’m sorry to say, I just don’t agree.
Price elasticity is a concept from classic economics that (from my college recollection) deals with the impact of pricing changes on overall demand of an entire market.
The concept is interesting, but the whole idea behind this post is to look at pricing in relation to the value that is received from a specific target customer (not the entire market).
You make some points that seem more relevant to large corporations (i.e cost-of-capital based return).
The reality for most small business owners out there is that their business is the vehicle that serves their personal lives. And what matters most to them is creating financial results that serve them.
And they do that with a tiny fraction of an aggregate market (they only have a few customers relative to the total market) so concepts such as price elasticity (technically, in economics the correct term is “price elasticity of demand” – since it is demand that changes in response to price levels) are less relevant.
Great analogy that will hopefully help small business owners understand pricing better and lead them to higher profits.