On a recent trip to Paris I was staggered to discover the huge variation in the price of a humble cup of tea. Who would have thought that a pot of boiling water and a handful of tea leaves could command a price of almost 5 Euros?
What pricing strategy are Parisienne restauranteurs and bar owners subscribing to? Is it simply the obvious ‘rip off the tourist’ strategy or something altogether more sophisticated?
I was particularly taken by one establishment that displayed no less than three separate prices for a cup of tea. The price got progressively higher the closer you sat to the main road. To enjoy your beverage taking in the full ‘Parisienne pavement experience’ you could pay almost twice as much as sipping your tea at the bar. I have to admit to being impressed by the use of micro location as a price differentiator; clearly Parisienne restauranteurs know their customer base well and are cleverly commanding a premium price for a commodity product.
Secretly though I was pleased that it was a cold day; I was more than happy to sit at the bar and take advantage of the minimum price of a cup of tea. Now, perhaps if they really thought it through they would take their pricing strategy to a whole new level by reversing the structure on a cold rainy day. Or perhaps there aren’t that many sad British tourists who can’t survive more than an hour without a cup of Rosy Lee, to make using the weather as a pricing factor worth while!
You’ll find more in-depth information on pricing strategy at thepricingjournal.com or get in touch if you’d like to discuss your pricing strategy over a cup of tea!
Recently I have had a number of conversations with business owners who are finding it increasingly difficult to maintain a reasonable rate for the service they offer. They report that more and more contracts are being won or lost on price. Yet others seem to have no problem earning what they are worth.
Sure, we are in pretty tough economic times and price will always play its part in business decisions. In my experience though, price is rarely the most important factor when it comes to a clients list of requirements. If you find yourself having to discount heavily to win business here are some of the questions you should be asking yourself:
- Are you attracting the right target market? Can your particular market segment afford the service you offer or do you need to look at new segments?
- Are you providing value for money? How much value can you add to your client and what is the net benefit of using your services?
- Are you communicating the value of the service that you offer? Are you focussing too heavily on the price you charge at the expense of the benefits you are offering?
- Is price the real reason you are not winning business or is there something more fundamental, like your service level, holding you back?
- Do you discount as a matter or policy? Discounting can give a client the impression and you don’t think your services are worth the full price.
It may be worth taking a closer look at your business model before blaming the fact that you can’t charge what you would like on the economic climate.
My introduction to the thorny issue of pricing came very early on in my career. As a graduate trainee I was set the task of adding up a whole set of costs to establish the base price for hundreds of holidays. The margin was then added and, there you have it, a how-to guide to pricing! Well not quite.
I remember even more vividly what happened next . Our main competitors published their prices. We spend that day (and night) comparing all our prices and undercutting the same holidays by £5.
Just out of the cotton-wool world of academia this was a real eye-opener for me.
There are many, many pricing strategies and it is a hugely complex subject best approached with an expert. For small and medium businesses though here are a few of the most common pricing approaches:
- Cost plus pricing – add all the costs associated with the product or service you are selling (not forgetting you margin) to determine your price
- Competitor based pricing – if your product or service is similar to your competitors check out their pricing structure and set your prices accordingly
- Market based pricing – determine what your target customers are willing to pay for your product or service and use this as a guide.
In reality most small businesses will use a mix of all the above methods to set their base prices. It is important to have a robust pricing strategy in place, particularly if you plan to employ tactical pricing initiatives such as discounting…then that’s a whole different subject!