What pricing strategy will maximize revenue and attract customers? How do we balance pricing to cover costs while remaining competitive? We believe price increases should be strongly considered each year. Here’s what to consider as we approach 2025.
Adjusting your pricing can be a game-changer for boosting revenue. However, to do so effectively, it’s essential to carefully structure your pricing model, select the right pricing strategy, and balance costs with competitiveness. As you think about changes for 2025, here’s how to make the most out of a price change.
1. How Should We Structure Our Pricing Model?
Understand Your Costs and Value Proposition
Going back to the basics is important, do you know your costs and margins? I suggest assessing your costs in two categories: The first is variable costs, costs like production materials or direct staff costs that go up or down when your revenues go up or down. The second is fixed costs, such as rent, office salaries, marketing. Analyze fixed costs in terms of how you would allocate them to customers or revenues. Looking at both variable and fixed costs ensures that your pricing not only covers your direct cost of sales, but covers all your expenses and allows for profit.
Where you need to spend most of your time is evaluating your value proposition. Identify the unique benefits or improvements your product or service offers your customers. What is their return on investment or “ROI”? If you’ve added new features or enhanced quality, your pricing should reflect these changes. Your pricing model should align with the value perceived by your customers, justifying any increase. For example, in business-to-business products, typically we like to see the product or service deliver more than 3 times its cost. In other words, if you cost $1, you need to deliver $3 of value. I know that seems like a lot, but it’s the point that we see customers really start to buy.
Types of Pricing Models
Here are several pricing models to consider:
- Cost-Plus Pricing (including hourly rates): Cost-plus pricing is a good fit for industries where you set your prices for your services by adding a standard markup to your cost. This ensures that all costs are covered and provides a clear path to profitability. If you are calculating hourly rates, be sure to have sufficient markup to cover downtime, vacations and business development time. Don’t price so that you need every hour to be billable.
- Example: Adding a margin to your cost
- Value-Based Pricing: Price according to the perceived value to the customer rather than just the cost. This approach can be particularly effective if your product delivers substantial benefits or solves critical problems for customers. For example, if your product delivers $10 of value, you should get $2-$4 of that. Less for products that still have to prove themselves and more for products with a demonstrable history of delivering value.
- Example: Value-based pricing can look like taking a percentage of a customer’s savings. Using the 3x rule discussed above, if I save $3 I can charge you $1.
- Tiered Pricing: Offer multiple levels of service or features at different price points. This strategy can cater to various customer segments and increase overall revenue by capturing value from both budget-conscious and premium customers. Always ask for something in exchange for any “discount” from your “standard” pricing – longer contracts, willingness to be a reference, etc. Just because some of your clients are price sensitive, doesn’t mean you can’t ask for something in return for lower pricing. This also helps you defend your higher pricing to less price sensitive customers.
- Example: Tiered pricing helps capture a larger
- Bundling: Combine related products or services into a package at a discounted rate compared to purchasing each item separately. This can increase the average transaction value and enhance the perceived value. Sometimes, products with a narrow set of benefits are hard to sell on their own, but are great value adds that help you win more customers for your main products.
2. What Pricing Strategy Will Maximize Revenue and Attract Customers?
Value-Based Pricing
Value-based pricing is often the most effective strategy for maximizing revenue. By setting prices based on the perceived value to customers rather than just your costs, you can capture a premium for high-value features or benefits. This approach aligns your pricing with the real-world impact of your product or service, making it easier to justify higher prices.
Dynamic Pricing
Implementing dynamic pricing allows you to adjust prices based on demand, market conditions, or customer segments. For example, you might charge more during peak times or offer discounts to attract price-sensitive customers. This flexibility helps maximize revenue by optimizing prices according to real-time factors. This can be hard to implement and even harder to explain. Make sure you can be very clear, so as not to hurt your brand with backlash.
Tiered Pricing and Bundling
Offering multiple pricing tiers or bundling products can attract a wider range of customers. Tiered pricing allows customers to choose a level of service or features that fits their needs and budget, while bundling can increase the overall value of purchases. Both strategies can enhance customer satisfaction and drive higher revenue. Again, always ask for something in return for any discount from your standard pricing.
One creative way I have seen tiered pricing work well is when a firm has limited capacity. For example, an advertising agency I know prices work aggressively when times are slow and increases prices higher and higher the busier they get. Their pricing is a function of their own economic reality.
3. How Do We Balance Pricing to Cover Costs While Remaining Competitive?
Conduct Market Research
Perform thorough market research to understand competitor pricing and customer expectations. This information helps ensure that your new prices are competitive while covering your costs. By analyzing how similar products are priced, you can position your pricing strategically to attract customers while maintaining profitability. Most importantly, spend time deeply understanding your product’s impact on your customer – you will likely find hidden gems: sources of value you may not have realized were important to your customer.
Optimize Operational Efficiency
Obviously, you should always be streamlining your operations to reduce costs without sacrificing quality. Improving efficiency through better supplier negotiations, process optimizations, or technological advancements can lower your cost base, giving you more flexibility in setting prices. This helps you remain competitive no matter what happens with your pricing.
Monitor and Adjust
Pricing is not static – it requires ongoing evaluation and adjustment. Regularly review your pricing in response to changes in costs, market conditions, and prospect/customer feedback. Be prepared to make adjustments as needed to balance cost coverage with competitiveness, ensuring that your pricing remains attractive and profitable over time.
4. How Do We Implement Price Increases?
Price increases can be stressful to consider. Many entrepreneurs worry about potential blow-back and lost customers. But, we have all felt the increased cost of everything from salaries to insurance to software and we still keep buying. Why should our margins suffer? I believe price increases should be strongly considered each year. If you have, for whatever reason (cost increases, feature enhancements, value provided, profitability), decided to implement a price increase, there are a few ways I recommend you go about it.
- A/B test new pricing with segments of proposals and see how it affects close rates.
- A/B test price increases with segments of existing customers and see how it affects churn.
- Add fees. For example, many companies do not charge for credit card fees when they can really add up. This may push more customers to pay you directly, which can not only help you save on fees, but also gets you your money faster.
Conclusion
Effectively leveraging a price change involves carefully structuring your pricing model, selecting strategies that maximize revenue, and balancing cost coverage with competitiveness. By understanding your costs, implementing value-based and dynamic pricing, and continuously monitoring market conditions, you can boost profitability while meeting customer needs. Regular reviews and adjustments will help you maintain a competitive edge and ensure long-term success.
Want to find the right choice to maximize your profits? We can help! Schedule a meeting or drop us a line and we will get to work.