The Lack of a Pricing Strategy Can Stall Your Efforts to Scale
Since September 4, 1972, American television viewers have heard host Bob Barker (and later, Drew Carey) welcome the studio audience of The Price is Right to, “Come on down!” The object of the TV game show is for contestants to accurately guess the prices of retail items. The contestant that’s closest to the actual price wins. Getting the price right when charging for your goods or services is a bit trickier—and the consequences of getting it wrong are much more serious. The lack of a pricing strategy can stall your efforts to scale your business.
Notice that I refer to a pricing strategy. This is much more than simply setting a price. It needs to be thought out. Hubspot.com offers a very straightforward definition of pricing strategy:
A pricing strategy is a model or method used to establish the best price for a product or service. Pricing strategies help you choose prices that maximize profits and shareholder value while considering consumer and market demand.
It Sounds Simple, But . . .
That sounds fairly straightforward and simple, but there’s a lot more to creating the right pricing strategy than might appear on the surface. A lot of factors can enter into choosing your strategy. On top of that, we’re all aware of the constant changes in the marketplace that can force a company to re-think its pricing. New technologies, material costs, and labor costs can all impact your profitability—and therefore your price. Competition and changes in what the market demands will also affect the viability of your pricing.
What Kind of Pricing Strategy is Right for Your Company?
If you’re trying to scale up your company, you may have a different pricing strategy at different stages of your growth. Here is just a partial list of the different strategy options from which you can choose:
- Value-Based Pricing
- Penetration Pricing
- Premium Pricing
- Competition-Based Pricing
- Cost-Plus Pricing
- Dynamic Pricing
- Freemium Pricing
- High-Low Pricing
Each of these pricing options focuses on a particular business need. What’s right for one company may not be right for another. Beyond that, what’s right for you as a start-up or small company may not be appropriate as you scale up your business and look to expand your market share.
Competing on Price Alone is Dangerous
It’s important to understand that your pricing strategy is only part of your overall strategy. It’s dangerous if your price is the only reason prospects choose you. If your sole value proposition is offering a lower price, what happens when a competitor comes along and offers the same product or service at a lower cost? If you have nothing else of value to offer, you’ll lose customers. Your only recourse is to reduce your price.
What if Your Price Isn’t Right?
What happens if your price no longer covers your cost of doing business? You won’t be able to fund your efforts to scale up and grow your company. You’ve heard it before. Business growth requires cash. No cash means no growth. Even worse, if you’re not covering your costs, you’ll eventually go out of business.
Developing the right pricing strategy requires serious attention and an understanding of how your pricing fits with your overall strategy. Helping scaling companies keep that perspective is one of the things I focus on with my clients.
Failure to price strategically is a trap that many scaling businesses fall into. Unfortunately, it’s not the only “growth trap” you’ll face as you scale up. I invite you to download our free How to Avoid the Growth Traps eBook so that you can guard yourself against some of the most common missteps and mistakes that scaling companies face.