Follow Adam Linkedin Twitter Facebook
Email Adam Email
Financial
Mar 15, 2016

How Should You Price Your Product Or Service?

Sponsored Content provided by Adam Shay - Managing Partner, Adam Shay CPA, PLLC

The old-school thought process in pricing products is to take your cost and add to it some sort of markup to cover the product, overhead and profit to determine the final price of your product or service. In this Insights, I’m going to explain why that thought process is wrong and will cost your business and its profit. Not everyone will agree with me, but after years of learning from Ron Baker at the VeraSage Institute, these are my beliefs.

Instead of cost-based pricing, you should focus on the value you deliver to your customers and capture that value in the form of profits. Value pricing relies on four main tenants:

  1. All value is subjective. If you were in Boston this winter selling snow blowers, you'd know these machines are much more valuable now than during a normal winter. You also could charge more for them. I am not encouraging price gouging (artificially raising your price in order to take advantage of a short-term situation) but instead, I encourage pricing your product or service for the value you deliver to the end customer.
     
  2. Price the customer, not the product. Your product may have more value to one person than the other, depending upon each person's situation. You need to have value conversations where you drill down on a potential customer's needs and wants to price correctly.
     
  3. Pricing is contextual. How your prices are interpreted is going to depend on reference points and comparison. If you have a mid-priced product in a dollar store your product will appear expensive. If you have the same product in a Louis Vuitton store, it will appear cheap.
     
  4. Not every customer is right for you. Some potential customers just won't get it or are shopping solely on price. Let them pass you by. They're more trouble than they are worth and will almost never see value in a product other than price.
How do you apply this approach to various business types?
  • For service-based firms, abandon the billable hour. It's an antiquated labor theory, doesn't provide your customers with a price up front, and limits your returns. It puts you and the customer at odds, as you want to maximize hours and your customer want to minimize them. In addition, if you work smarter or more efficiently, you actually make less money. Instead, have a value-based conversation with your customer and price at a specific point in time.
  • For technology companies, drive the value that your product delivers and price it appropriately. Understand that value in great detail, and don't choose a random monthly subscription fee because it sounds or feels right.
  • For retail and restaurant businesses, frame your products in the proper manner. If you are a high-end restaurant and have a $100 menu item, the $50 menu item no longer appears expensive. You may never intend to sell the $100 menu item, but use it instead as a price point against which to frame other items on the menu.
My goal today was to give you additional insights and thoughts on pricing and I hope that you come away with some new ideas. Let me know in the comments section if you have any questions, and please share your experience and approach to pricing products and services. I always love hearing what other people are doing.

Adam Shay, CPA (N.C. License Number 35961), MBA, is managing partner of Adam Shay CPA, PLLC. He focuses on minimizing taxes and improving the financial results of entrepreneurs, and is actively involved in supporting the Wilmington entrepreneurial and startup community. For more information, visit http://www.wilmingtontaxesandaccounting.com/ or email him at [email protected]. He can also be reached by phone at (910) 256-3456.

Other Posts from Adam Shay

Adam shay blk 52015121549
Ico insights

INSIGHTS

SPONSORS' CONTENT
Dave hoff heashot 300x300

What is a 360-Degree Assessment and Why Should You Be Interested?

Dave Hoff - EASI Consult
Corey61

The Cape Fear’s “Best Places to Work”

Corey Lewis - Cape Fear Jobs
Tysonemery

Are You Ready To Buy Your First Home?

Tyson Emery - KBT Realty

Trending News

Chops Deli Co-owner Explains Financial Woes Behind Fundraising Campaign

Jessica Maurer - Jun 18, 2018

At ILM, Regional Carrier's Technical Issues Cancel Flights

Christina Haley O'Neal - Jun 18, 2018

In The Current Issue

Banks Respond To Dodd-Frank Changes

Just how will the much-trumpeted recent changes to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act affect local financial...


Mirimichi Looks To Changing Landscape

Russ Britton started his sustainable landscape products company with a star-studded partnership and plans to continue to grow Mirimichi Gree...


Labor Market Checkup

The demand for health care workers in an area like the Cape Fear region is expected to remain healthy for years to come, experts say....

Book On Business

The 2018 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2018 Power Breakfast - Dishing on the Restaurant Biz
2018 WilmingtonBiz Expo - Keynote Lunch with Eric Dinenberg, Rouse Properties
2017 Health Care Heroes