4 Steps to Understanding Customer Value

How to price a product or service is one of the most common questions answered by our Business Advisors here at Small Business BC. Many hope for an instant formula to apply or a reference book to consult, but to understand how to decide your pricing, you must first understand who your market is, and how they perceive value.

You cannot simply base your price on what your competitors are selling at. Equally it cannot be purely based on a simple mark up of cost of item/service plus a percentage. Although these are both important factors, you must also understand what the customer is willing to pay. By completing this research you will save yourself from missing out on potential customers by pricing too high, and ensure you are providing yourself with the opportunity to gain the maximum profit.

Here are some things to keep in mind as you crunch the numbers:

1. Survey your market. Talk to your customers or target market and take time to ask them questions. Ask them how they value your product, and what makes them choose your business or product. It will help you build relationships with your customers as well as giving your valuable insight

2. Understand your competition. This can be an awkward question to ask a customer, but ask, “If you weren’t doing business with me, where would you go?” This will help you understand how your competition is different from your business, and what your customers’ value from that difference. You may be surprised to learn who your real competitors are and what benefits they may have over your business.

3. Be honest with yourself. Take a step back and be objective, don’t overvalue the positive aspects of your business and ignore the advantages of your competitors over you. For example you may pride yourself on low prices and the clients you attract with those; however you may find that your customer service is not as good as a competitor, so you may be missing out on business. By simply charging the same or lower than a competitor may mean you miss the mark.

4. Recognize that everyone is different. While some of your customers my value you as a local neighbourhood store they like to support, others may only use you if they can’t make it to their usual big box store. What you charge is really more a question of the type of customer you would like to attract and how you want to compete in the market. The smart move is to set your prices for a particular target market, rather than try to attract all and risk failure.

One last piece of advice? “Attend Bill Erichson’s Pricing and Costing Your Product seminar,” advises Amy Elgie, one of our Business Advisors. “Bill can help you understand the 4 C’s of pricing: costs, constraints, customers and competition, and demonstrate how your pricing will play an important part in the success of your business.”