Do You Know Your Pricing Philosophy?

When conducting a review of your pricing the first thing to do, before you even consider your pricing strategy, is to understand your pricing philosophy. So want’s that?

I could start by asking you what you sell, but it’s really a trick question. That’s because I’m not interested in the actual product or service that you sell; in reality, you are selling only one of three things. Your inputs, your output, or the value you create.

Inputs are whatever goes into what you sell.

Professional services firms, especially solicitors, are well known examples of using this philosophy. You typically buy their time, and pay a certain price per hour. If they are great at what they do they might charge a higher hourly fee, if they are operating out of their bedroom they might charge lower, but either way they are just selling hours - their inputs.

It’s the same with manufacturers who use cost+ pricing. They add up the cost of raw materials, the cost of labour, overheads such as admin or rent, and then add a fixed margin on top. So they are also selling their inputs, and the key giveaway is this: if their costs go down, their prices go down, because they add a margin to their inputs; if their costs go up, prices go up.

Outputs are the things you actually sell, whether it’s a product or service, when all you do is follow the market price. If you charge a price for conveyancing, a haircut, a mobile phone or whatever and that price is based on what everyone sells the same product or service for, then you are selling an output.

Value is the difference you make for your customers. The additional sales or profit they make, the extra costs they save, the way they feel when they use the product.

For example, most of the technology that goes into a Skoda Superb and an Audi A6 is the same. Major components are identical. The key difference is the badge, and people pay a premium for that because of how it makes them feel. Yes, each occupies a different segment of the car market, and within that segment they match on price… but the difference in price between each is based on value, and in this case it’s the psychological value of owning a premium brand.

What’s the point of understanding this?

This is all about how you view prices. You will struggle to improve your margins if you can’t find ways to move from either input or output pricing to value pricing. And you need to figure this out before you start any other pricing work.

You don’t have to have only one approach. Maybe you have one pricing philosophy for one channel and a different philosophy for another; maybe you approach different markets with different philosophies, or new verses current customers, or new verses current product, etc.

The important thing is to recognise your current philosophy, and to think about the right philosophy each time you approach a pricing problem.