Steve Ballmer, ex CEO of IBM puts it more starkly, 'This thing called ‘price’ is really, really important. I still think that a lot of people under-think it through. You have a lot of companies that start and the only difference between the ones that succeed and fail is that one figured out how to make money, because they were deep-in thinking through the revenue, price, and business model. I think that’s under-attended to generally'
So what is the right price?
Ron Baker, Value Pricing expert argues it should be based on value provided to the customer rather than 'accounting' methods like chargeable hours or 'cost plus'. In his book, 'The firm of the future' he gives an example of an accountant who helps a wealthy client sell their business. He is at the client's beck and call for many weeks, uses his knowledge and lifetime experience to deliver an exceptional deal and then he is very pleased with himself when he eventually presents the client with a quite a large bill for hours worked. The client is even more pleased because in the context of the business sale the fees charged were minuscule. If the accountant had charged a fee based on value delivered, his client would have still been very happy and he would have been able to charge significantly more than the self-limiting hourly rate. The same principle applies to tradespeople who often limit their pricing with day rates when the value delivered is often significantly higher.
Let's be clear. This is not about overcharging. This is about thinking carefully about the value provided, agreeing terms in advance and then delivering on your promises.
'My business is different' you might say. 'It's very competitive, the price is set by the market'. This can be true of commodity products or services. If you are trapped in this mindset it is not a nice place to be. The challenge I think is try to differentiate your product or service offering so that you provide some unique value and are not competing solely on price.
All accountants know that an increase in price feeds straight through to the bottom line. It is additional profit with no energy expended other than making the decision and presenting it to your customers. A decrease in costs also increases profit (to a lesser degree) but often there are consequences - you need to give something up, improve productivity, work with another supplier etc. Pricing is the biggest lever for increasing profits.
So I don't have all the answers but I do know that getting the price right is critical for business success. As Steve Ballmer says business owners need to think it through and keep thinking it through. It can be the difference between success and just muddling through
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