Five keys to profitability: Part 2

Click here for Part 1:  Attention to cash flow

 

Value Pricing

Most owners of small businesses decide their price by following the crowd (I’ll charge what everyone else charges) or will base the price upon costs plus a markup. Neither will lead to business success. When following the crowd, it is important to remember that most of the companies you are following will never be more than a modest, sweat soaked success.

But surely cost and attention to margins will lead to business success?

Not especially.

Do you own a smart phone? Is the price tag for an Apple iPhone a function of costs? Not at all! It is a function of brilliant marketing that persuaded millions that they needed this new piece of technology. People see value in their smart phone and are willing to pay the price to own one. And the truth is that in late 2011, Apple’s profits were an eye watering 70% on the retail price of each iPhone.

In the 1960’s, Ford and GM offered sports cars for sale. But the Mustang was a better value proposition than the Corvette and millions of Mustangs instead of hundreds of Corvettes were sold. Ford found a target market that was willing and able to pay the price.

A pricing strategy that thrusts value pricing to the forefront of any marketing effort will result in better profits. This strategy needs to be written down with specific sales targets in mind and revisited annually to see if it is still working. As business people, we get busy in the day to day and forget that we must pay attention to the strategic aims of the business in order to drive profit.

Value pricing is the working end of developing a unique selling proposition (USP). A good Unique Selling Proposition has the following characteristics. It highlights a specific benefit to be had from using your company or buying your product. The proposition itself must be unique - something that competitors do not, or will not, offer. The proposition must be strong enough to pull new customers to the product or service. It is short. It paints a mental picture. The differences highlighted must be substantial.

Need an example?

"You get fresh, hot pizza delivered to your door in 30 minutes or less -- or it's free."

All of the above characteristics are embedded in this simple statement, a huge success for Domino’s.

Value pricing establishes the reason that customers will buy from you. Value pricing shines a floodlight on the benefits to the customer and not the price. Value pricing results in higher profits.

 

Written by Andrew Gregson, Senior Partner at Floodlight Business Solutions and author of Pricing Strategies for Small Business (2008). 1-888-959-0752 www.floodlight.ca. Floodlight Business Solutions, where we help you drive profits.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.