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
Aarp suzanneheadshot 300x300

65-Plus Voters May Tip The Scales In 2020

Aaeaaqaaaaaaaaidaaaajdhiztrkodm0lte2yjetngrkmy1hotrmltawmdvlmwqyztmymw

Something In The Way You Walk

Diane Durance - UNCW Center for Innovation and Entrepreneurship
Carolinemontgomery4

Tax Notices In A Covid-19 World

Caroline Montgomery - Adam Shay CPA, PLLC

Trending News

In Downtown Wilmington, First Commercial Tenant Opens At River Place

Cece Nunn - Sep 22, 2020

Save Our Hospital Files Suit On NHRMC Deal

Vicky Janowski - Sep 22, 2020

At Mayfaire, Burney's Sweets & More Opening Soon

Jessica Maurer - Sep 23, 2020

Judge Weighs Temporary Delay Request On NHRMC Vote

Vicky Janowski - Sep 23, 2020

Rumcow Owners Launch New Restaurant On Grace Street

Jessica Maurer - Sep 23, 2020

In The Current Issue

Lumber Prices Through The Roof

The prices of lumber have increased exponentially over the past several months....


Making Room For Outdoor Dining

Places to eat and drink are expanding outdoor spaces to accommodate more customers and help with increased revenue....


Info Junkie: Michealle Gady

Michealle Gady, founder, president and CEO of Atrómitos, an SBA-certified woman-owned management consulting business, shares her tech and in...

Book On Business

The 2020 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2020 Leadership Accelerator: Virtual Workshops for Real Leaders
2019 Health Care Heroes
August 26, 2019 Power Breakfast: A Healthy Sale?
2019 WilmingtonBiz Expo Keynote Lunch - CEO, nCino, Pierre Naude`