“Price setting is a thought process not a formula.”
One big misunderstanding around setting prices is, people believe there’s a mathematical formula to find the right price. This belief or hope holds many people back from doing the work that’s needed to find the best prices – finding a price that’s right for them and their customers.
So if it’s not a formula but a thought process it begs the question, what does that really mean? It means you need a something to help you think through what the best prices could be – that’s where the a price setting thought process comes in. In part it’s a series of questions you should ask centered around strategic decisions in your business. The answers to the questions not only determine what you’ll do in your business but what prices are most suitable. This is also why 1 element (like competition or cost) shouldn’t determine your price. It’s just not enough information to give you a realistic view of the “best” prices.
Recently I sat down and made a list of the questions one should be asking when price setting. Once I got going even I realized there are more questions than I first thought. Not all apply to every business, but just because it doesn’t now doesn’t mean it might not later. I am sure about one thing – many of the questions you’ve never thought of.
In This Episode
In this episode I share with you 12 questions you can ask yourself when you start setting prices. These questions are one’s that apply to all business types. This is part 1 of a two part series. Whatever you do remember pricing is a thought process – meaning after you gather the information and ask the questions you still have to make the decision on what price to choose. It often means you’ll adjust things in your business, or go back and check your assumptions along the way as you get new information. The great thing is that now you’re making decisions based on a more solid foundation.
Podcast Episode Highlights
- 0:00 Intro
- 2:10 Questions One to Four
- 3:41 Bringing Right Offers and Solutions
- 4:50 Questions Five to Eight
- 5:45 Makes You Feel More Confident
- 9:09 Questions Nine to Twelve
- 13:02 Wrapping It Up
“If you can quantify the economic value of your offer, then you’re going to have a much easier time setting the right prices and then communicating that so that people will be (more) willing to pay it.” Janene
“Direct competitors are people who are solving the same problem in the same way, whereas often indirect competition can actually be a bigger competitor. These are your competitors who are trying to solve the same problem, but doing it in a different way.” Janene
“You want to set your prices based on having a profitable business. You don’t have to be exceedingly profitable if that’s not your goal, but you need to be reasonably profitable because your profit is the fuel that drives the engine of your business.” Janene
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Janene: Welcome to this episode, today we are going to be talking about 12 questions to ask yourself when pricing your offer. Now, you might think that this is pretty easy for me, but I gotta tell you, when I started writing down questions, there were a lot more than 12 , but I didn’t wanna overwhelm you at the start.
Let’s just cap it at 12 for now to get those creative juices flowing and to get you started. if you follow me, then you will know what the very first question is going to be, because you probably heard me say it 101,001 times at least.
Questions One to Four – Where to Start with Price Setting
The first question you wanna ask yourself is, who’s my target customer? Now, I know some of you may think, well, why is that the first question? Wouldn’t my first question be related to my offer? And I always think the customers should come even before that because too often people are out there making assumptions about what their customers want developing offers that. Then don’t suit the market.
And this is actually one of the number one reasons why businesses fail. We wanna make sure that you understand those customers so that you can bring the right solutions to them that they’re going to be absolutely willing to pay for. Question number one is, who’s the target customer?
Question number two. What’s the problem the customer is seeking to solve or the transformation they want to achieve? Right? So depending on your type of business, this could be different. And let me be clear about something. These questions are relevant whether you have a product, a service, or a software or some combination thereof.
You wanna understand what they are looking to get help with. And then once you understand that, then you can start to think about the next question. And the third question is then how can I help them solve that problem or achieve that goal? Now I’ve run into this with many clients of mine over the years that they were struggling to sell, and the reason was there another problem in the way before they could actually sell what they wanted.
Bringing Right Offers and Solutions
And if they found a way to help the customer solve the first problem, they would then be the first people in line to help them solve the problem they really wanted to solve in the first place. So again, by understanding your customer, then you can bring the right offers and solutions to them at the right time and make that sale or make that connection.
Question number four, what are they willing to pay to solve that problem? And then what are they willing to pay for your solution to that problem? I’m putting this as one question even though it’s two.. But they’re related to willingness to pay and understanding your customer’s willingness to pay is going to give you a lot of insight into what to charge.
Now, just because somebody’s willing to pay something doesn’t mean that is profitable for your business. Or that you should even charge that much because maybe not everybody’s willing to pay that much. So of course you have to take that information around willingness to pay and put it in the context of other potential price points.
Questions Five to Eight
Question number five when thinking about price setting is, what’s the economic value of my offer, and have I given people enough reason to pay more? Value is what they’re going to get out of it. An economic value is quantifying that. Too often people will talk about value in loosey-goosey terms, but when I ask them to quantify about the value, they get really squirmy because they don’t quite know how to go about quantifying that economic value.
But when you do understand, if you understand that your offer has the potential over the next year to bring your client 10,000 and you’re only charging 2,750, it puts your offer into context. You know that they have a fairly good chance of getting a return on their investment in a reasonable time.
Makes You Feel More Confident
It makes you feel more confident in what you’re offering. If you can quantify the economic value of your offer, then you’re going to have a much easier time setting the right prices and then communicating that so that people will be (more) willing to pay it.
Question number six, what alternative solutions are there available to them, both direct and indirect and at what prices? As you can imagine, this has to do with the competition. Now, one thing that I should point out here is, most of us think in terms of who are our direct competitors. Direct competitors are people who are solving the same problem in the same way, whereas often indirect competition can actually be a bigger competitor.
These are your competitors who are trying to solve the same problem, but doing it in a different way. You might think of a direct competitor. Let’s say you’re selling automobile. Automobile is the direct competitor. Other automobile manufacturers, but another way to solve your transportation problem is a bike , depending on the distance, of course.
They could be an indirect competitor, right? Or you might think of bicycles and mopeds, right? Don’t forget to consider those indirect customers. And then of course, look at the pricing that is attached to offers from both your indirect competition.
One Step Further than Indirect Competition
Number seven, what else is competing for the customer’s money in this area? This is going one step further than indirect competition, but most people have finite amount of cash in their pocket or in their bank account. When it comes to certain expenditures, if it’s a business, they have budgets and certain amount of money to spend.
Example for leadership training, what else is competing for that money? Maybe they have a health program for employees as well, but all the leadership training and the health program offers that they have come out of the same budget. They’re maybe solving two different problems, but they’re competing for the same money.
This can happen in business-to-business situations or business-to-consumer. Basically, can happen anywhere, it’s a good idea to think about what else might be competing for that money, because then you may be able to find ways to manage or deal with that or address those.
Number eight, who will be deciding what to purchase and how much to spend and how is that buying decision made? I think and it’s important in the context of your business to understand that.
If you’re selling B2C and nobody else is involved in the conversation, then it’s relatively straightforward. But if you are doing even if you’re selling b2c, but maybe it’s a husband-and-wife situation or a partner situation where there’s more than one person involved the decision, that can be very important for you because they may have a lot of influence over what is purchased.
When you understand who’s making that decision and how that decision is made, then you can factor that into your own conversations around pricing and or how you, or what prices you offer, how you offer them and what you offer.
Questions Nine to Twelve
Question number nine. How do they want to buy it? Now, this may seem like a funny question, but in fact, people like to purchase things in different ways, and depending on your market or the segment that you’re going after, there may be different ways in which people want to pay so they can pay different payment plans.
The process of paying can be different, they can come in, they can send via e-banking. It could also be no, do they pay monthly? Do they pay yearly? And those things may actually influence the price that you set. It’s good to have thought about that in advance as well. Let’s see.
Question number 10. We’re almost to the end here, ladies and gentlemen. What will it cost to run the business and deliver the offer? This goes into the cost basis. Of course, one of the things, and we’ll get to this in a moment, you’re gonna have to check your profitability. But in order to do that, you have to understand the cost for you to run and run the business and deliver what you deliver to your customers.
If you don’t think about that, then it’s very hard, almost impossible for you to come up with a price that will lead to a profitable business. You have to take a look at that. You have to be able to do those calculations, or at least have somebody do it for you so that you can understand that better.
Understand What is Realistically Achievable
Number 11, how much do I think I can sell on a regular basis? This is a question that has to do with how much volume you can bring in. If you’ve been to one of my web classes, you know that there are only for profit levers in any business. Any business. Doesn’t matter.
There is price, volume, fixed costs, and variable costs. Volume is one of them. You need to make estimates about how much you think you can sell. Then you need to go out there and try and do it. But when you do those simulations or make those calculations around Profitability, you’re gonna must understand what is realistically achievable for you to sell, because that will be part of that profit calculation. It should be of absolutely positively no surprise that.
Question number 12 is, at what price can I be reasonably and sustainably profitable? Here’s a tip for you because this is a mistake that a lot of businesses make. I even had this conversation with a client this morning, the approach was, well, I just need to cover my costs right now, and so I’ll set the price based on covering my costs, but that is the wrong approach.
You want to set your prices based on having a profitable business. You don’t have to be exceedingly profitable if that’s not your goal, but you need to be reasonably profitable because your profit is the fuel that drives the engine of your business.
Wrapping It Up
So please when you come to setting your prices, you want to look at how you can be reasonably profitable upfront so you can get that engine running in your business and build that sustainable profitability. Tactically, you can do some other things here and there if you want to, but always please, set your business up. Set your prices up to be profitable from the start.
Those are the 12 questions I wanted to share with you that you should be asking yourself when pricing your offer. Now, as I said, there are loads of other questions, I think what I’m going to do is I’m going to take some of those other questions I had for you and create a part two of this Solocast episode so that we can dig into some other areas as well.
I wish you all the best. If you have questions or if you’d like to find out more about how to work with me, head on over to thepricinglady.com and check out what we have there on offer. You’ll found lots of episodes that will answer a lot of your questions, and of course if you’d like to book that call, just click on book a call and we’ll get something set up.
Have a great day, and as always, enjoy pricing everyone.