by Chris Fulmer, Director
The Golden Vineyard Branding Company
Figuring out how much to charge customers is part of the entrepreneurial process. We’ve all experienced the fear of being undercut by competitors, losing customers by the droves, and promptly being driven out of business. As if this wasn’t enough to churn up a wicked case of acid reflux, the dread is compounded by the horrific fear of failure that leaves you wondering why you ever wanted to start a business in the first place.
If this hasn’t happened to you yet, I promise you, it will.
(Sorry for being so dramatic, but this issue is near and dear to my heart. Now, I’ll get back on topic.)
In this blog post, we’re going to explore why business owners struggle to price their products and what to do about it.
The root of the pricing problem
Before we can determine how much to charge for our products and services, we need to understand a couple of basic facts that will expose the real cause of the pricing conundrum. The first one is obvious:
Fact #1: Businesses create revenue when customers buy from them.
The second one is not so obvious and why so many businesses wrestle with pricing.
Fact #2: Potential buyers must believe that what our business offers (our product or service) has so much value that they’re willing to part with their hard-earned dollars to obtain it.
The solution to the problem with pricing isn't tied to price, but to the value you provide.
Now, before we go any further, let’s hit the pause button to examine how value is created in a job. This will help us better understand the money-making challenge we face as entrepreneurs.
The Employee Revenue Equation
As an employee, you're providing a service to the company in exchange for a wage. To get the job, the EMPLOYER approves of your ability to perform the service needed for the position you fill. That is, the employer perceives the value of what you offer the company. You then receive money in the form of a salary. This salary is set by a variety of market factors, but ultimately determined by the employer.
This concept can best be expressed in the following equation, which I call the Employee Revenue Equation:
Money received = Employer approval + Time worked
Using this equation, an employee can establish what their value is in a specific dollar amount. While it’s possible to find jobs that pay more or less than industry averages, comparing jobs can help an employee determine the fair value of the service they offer. It should also be noted that the employee begins receiving money the moment they start working.
But this equation doesn't apply to business owners. So, let’s hit the play button and examine the Business Revenue Equation and how that helps us determine the value of our products and services.
The Business Revenue Equation
When we start a business, the Employee Revenue Equation no longer applies to us and is replaced by the Business Revenue Equation:
Value created + Perceived value = Money received
Unlike the Employee Revenue Equation, there is a LOT of front-end work entrepreneurs must do before they can receive money. To provide a real-life example of this equation in action, we’ll use two landscape companies to illustrate.
Landscaper #1 thrives with a business of 20 employees, company vehicles, an office, and plenty of advertising. Meanwhile, Landscaper #2 struggles as a one-man operation with an old pickup truck and a part-time helper. How can it be that one landscaper is so much more successful than the other?
At first glance, we could assume that Landscaper #1 is better at what he does—he’s more skilled and experienced. While that could be true, it’s also very likely that Landscaper #1 has done a better job of communicating his value to potential customers, while Landscaper #2 has not. This is why it’s quite possible for two landscapers (or other businesses) to be equally-skilled but have completely different levels of success.
One of the biggest challenges for every business is to establish the value of their products and services in the minds of their customers.
The higher the perceived value of your product or service, the more money you can charge for it.
As a business owner, the customer is your employer. But business owners can’t rely on the job market to help them establish value. They must do it themselves. This is why many entrepreneurs struggle with pricing, which puts them at risk of not making the profit they want.
To overcome this challenge, there are two things entrepreneurs must do:
1. Be absolutely sure the VALUE of their product or service EXCEEDS the customer’s COST. You must be able to prove to your customer that this is true.
2. Assuming that #1 is true, you must then effectively communicate the value of your product or service to your potential customers.
Now, for the BIG question: How do we do this?
With great marketing.
What is great marketing?
Marketing is “the process or technique of promoting, selling, and distributing a product or service”.
If done well, this process takes a lot of time and a great deal of hard work. It’s important that businesses know exactly who they’re trying to help and exactly how they can best help those people.
You may have heard that “getting clarity” and “solving a problem” are key in marketing to customers. But the process only starts there. Even though these things are absolutely essential to your success, knowing them isn’t enough.
You must also know where to find the people you can help. It’s likely they aren’t out looking for you, which means it’s up to you to find them. Only once you’ve found them will you then have the opportunity to tell them what you do (how you can help them).
But as you now know, part of the Business Revenue Equation means you must also effectively communicate your value. This means you must know how to get the attention of your potential customers, draw them in, and encourage them to take the next step (buy from you).
If you’re a bit overwhelmed by all of this, don’t worry. Sit down, clear your mind, and begin thinking about what your business does and who you can help the most. Then put yourself in the shoes of your ideal customer and ask these questions from their point-of-view (prompts to help you answer the questions are in parentheses):
Continue drilling down by asking more questions. If you keep asking why long enough, you’ll begin to understand your customers on a much deeper level. This is where great marketing begins.
Also, consider everything that could possibly separate your products and services from competitors. Then, leverage that as a selling point.
This process will help you create your Unique Selling Proposition.
And if you get stuck, get help. There are business coaches and marketing agencies who will be able to help you AND accommodate your budget. It may take a while to find the right one, so keep looking until you do.
Until next time,
P.S. If you'd like to talk with us about how we can help you find and connect with your ideal clients, click on the button below to schedule a phone consultation. The phone call is free, but lost opportunity isn't!