Cash is King

We ask Adrian Critchlow to reveal what he wished he'd known when starting up his business.

When I set out in business I wish I knew "pricing is an art not a science". There is no black or white when it comes to pricing.

To sell anything you need to have a price. This may sound obvious, but early on when I was running an educational software company we had three products, each with an individual price.

Then one education authority asked for a licence for 300 school site licences. I agonised for days as to what discount I should give. I really wanted to get it right and in doing so nearly lost the sale! Without a price they couldn't place the order probability of getting the order with the wrong price is always greater than getting it with no price (i.e. probability = zero!).

So why is pricing an art? It's an art because pricing is about perception. Do you want to be perceived to be "fair", "low cost" (I hate the word cheap!), "luxury"; perhaps you want to be a little better value than your competitors, or perhaps you want to price above them so you are perceived as a "better" more expensive product, as we did once.

There is obviously some science that can be applied. You can start from the bottom up, 'cost plus', as it's known, and add the margin you want onto your cost price, or you can work on 'market pricing' and choose a price you feel the market will bear; alternatively as most companies end up doing, you can use a combination of the two. But at the end of the day it comes down to product positioning and perception, which encompasses much more than just the price.

It may seem obvious that you need a price to sell a product, but in this era of 24/7 internet shopping it's amazing how many products are promoted without a price or a 'buy' button.
About 50% of products I look at on the internet as an interested ready-to-buy-consumer, I end up not purchasing because they won't tell me how much they cost. 'Call us for pricing' or 'see your dealer' all too often result in a lost sale. Worse still are companies that link you to a reseller who has zero stock and points you to a competing product.

Maybe companies are worried about appearing too expensive or being judged by their pricing but at the end of the day if they are proud of the product they should be happy to display the price, the 'wrong' price is statistically more likely to get the sale than no price at all.

With regards to the science, I once ran a pricing experiment with a £39 product. It was a software CD, so it had a 95%+ gross margin, so we direct mailed to 1,000 customers an offer price of £39; 1,000 more were offered at £29; 1,000 at £19; and 1,000 at £9.95 (each offer the RRP as £39).

The results were very interesting. With every price point reduction it nearly doubled the number of sales highlighting that it is always worth considering volume as a key factor in your pricing decisions!

After all, the law of entrepreneurship still applies "Cash is King" and getting your pricing strategy right is a key part of achieving it!