When it comes to your pricing strategy, do you take an offensive stance or are you constantly on defense?
Defensive pricing is reactionary. You set your prices by responding to the prices of similar products on the market. But when you do this, you are letting someone else dictate the rules of the game. When they change, you have to respond as well.
On the flip side, offensive pricing puts you in control. You are the one on the attack. The one controlling the game.
If you don’t really have a pricing strategy, then it’s likely you’re opting for a defensive strategy by default. By loosely basing prices around other things you see in the marketplace, you are letting someone else dictate the price of your products.
And the result of always playing defense? You often end up lowering your prices to the point where you aren’t making a profit. (Or worse, not even covering your costs and taking a loss.)
There is another, even more troubling result of employing a defensive pricing strategy. When a large portion of a community relies on defensive pricing (like in the case of Etsy) the result is a downward spiral in price. If one person lowers, everyone else playing defense lowers their prices in response. This cycle continues as people believe the only way to sell more products is to lower the price to compete.
While there are situations where a defensive pricing strategy may be necessary, your primary pricing strategy should be offensive. You should be the one in control – the one leading the attack.
So how do you move towards an offensive pricing strategy?
- Know the real cost of your products
- Combine cost analysis with value-based pricing
- Differentiate your products
- Be confident in (and promote) the value of your products
1. Know the real cost of your products
Any pricing strategy needs to begin with a thorough understanding of what your products cost to make (and what your business costs to run) so that you can be sure you are making a profit. I’ve talked about this pricing formula before:
labor + materials + overhead + profit = wholesale price
wholesale price x 2 (at a minimum) = retail price
While there is wiggle room in this formula, it’s important to have a basic understanding of your costs, and set your prices accordingly, if you want to take an offensive pricing strategy.
2. Combine cost analysis with value-based pricing
Once you know your costs are covered, offensive pricing strategy requires setting a value-based price. Value-based pricing means setting your price in regard to the value the customer places on your product based on the next best alternative. This does not mean basing your prices on the market. Instead, what it means is looking at why your product is different than other available products (what value it provides) and pricing accordingly.
3. Differentiate your products
In order for you to employ a value-based pricing strategy, you need to be able to explain what unique value your product provides. Which means your product needs to provide a unique value. Part of taking an offensive pricing strategy means finding ways to differentiate your products from everything else on the marketplace. If your products are identical (or barely distinguishable) from everything else on the marketplace, then you will have to take on a defensive strategy by default. The only thing you have available to you is to compete on price. (And be now, we all know how I feel about craft trying to compete on price.)
4. Be confident in (and promote) the value of your products
In creating a culture of profit, I talk about the importance of being confident in the value your products provides. This is critical for an offensive pricing strategy. This is especially critical when taking an offensive strategy leaves you with prices that are higher than the majority of prices in the market in which you sell. When you are confident about and able to articulate the value your product provides, price becomes secondary. And when that happens, you can take complete control of your pricing strategy.
How do you approach pricing in your business? Are you merely reacting to the prices around you, or are you taking control of the price (and value) of your products?
If you’d like to know more about creating an offensive pricing strategy for your products, there is still room in my upcoming Pricing for Profit workshop. You’ll leave the workshop feeling confident in your ability to set prices that put you in control.