Pricing Based on Customer Expectations

Pricing, when done properly, is one of the most difficult tasks any business faces. Yet it is usually only given a perfunctory once-over.  Customers have a range in mind that they’re willing to pay, but if you ask them, cheaper is always better.  Ask a customer what they paid for something after the fact, and they’ll probably have a hard time remembering exactly.  Price something too low, and people wonder about the quality.  Price too high, and you’re out of budget.  How can you meet your customer’s expectations without directly asking them?

Price vs. Quality

Everyone has a certain quality vs price tradeoff that they’re willing to make for any given product or service.  There’s a quality level below which no one will pay.  Same as a high quality level.  In order for someone to be willing to pay for your product, you need to be within their range.

Think about the different stores where you can buy groceries.  There’s Trader Joes, Whole Foods, Kroger, Hiller’s, Walmart, Meijers, etc.  There are also more direct sources such as farmer’s markets and co-ops.  Each of these locations targets a specific price vs. quality niche.  For customers willing to pay for top quality foods and convenience, Whole Foods is their store of choice.  For those who are more price sensitive, Walmart is the choice (where there is still a certain threshold for quality).  Even lower on price are discount food stores where people are willing to pay even less for less quality.

How does this apply to your business?

You need to think about your customers.  Who are they? Are they looking for higher quality or are they price sensitive?  For those b2b companies targeting smaller businesses and entrepreneurs, price sensitivity is probably very high.  You need to provide lower priced services that have a quality they’re willing to pay for.  But, you don’t want to come off as too cheap.  Else you’ll be perceived to have low quality & value.

Take a look at your competitors.

What services are they offering at different price points?  What is the highest price charged?  Who is the target audience and what is being offered at that price?  What’s the lowest price?  What’s offered at that price?  Where do you want to fit in?

Offer different price points.

If you can, try to offer different products or services at different price points.  Offer a no-thrills price with very little in non-essentials.  Offer a middle and a high-end price with more options.  Think about the airlines.  Many have first-class, business-class and economy.  Each gets you to your destination, but they have different prices and different services.

How do you price to meet customer expectations?

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  • Rob Mangiafico

    Pricing is a slippery slope. And it really depends on the image you want to portray, and the level of service (or workmanship) that your company offers. If you do not want to compromise on quality, then your prices have to be higher than others in your field to often maintain that level that exceeds your industry standards.

    Unless you are catering to the most price conscious customers, raising prices or keeping them higher than the average can mean more income for less work. Lowering prices is often a “race to the bottom” as you have to work harder, continually grow the customer base, just to keep your head above water.

    If your company is known for high quality, be careful with offering differing price points… Those low priced options may cause your higher paying clients to question just what they are paying for, and the low priced options may be perceived as not as important as your higher priced plans/clients.

    But you can't just raise prices without providing value. If you are not known for high quality and unmatched customer service, this often backfires and causes an overall decrease in profits as customers go to other low cost services.

  • Andy @ FirstFound

    Great post. Too many people sell themselves short with their prices. They should remember that it's always easier to lower a high price than it is to raise a low one. If someone thinks you're worth £10 per hour, they're not going to want to up that any time soon. If they think you're worth £100 per hour and you're offering them a service at £80, they'll bit your hand off.

  • sazbean

    Rob, very good points. If you're going to be higher priced than your competitors, you need to have something to offer for that price. And I think it's also important to point out that you don't want to compete just on price. If your company has a competitive advantage over your competitors, you can compete on that instead of getting into a bidding war with your competitors (something that you want to avoid). Products that only compete on price are seen as commodities and have very little in the way of profit margin (think sugar, corn, etc.). Thanks for your comments!

  • sazbean

    Andy, I agree. I think it's better to start higher rather than lower. But you certainly have to offer enough value to make your price worthwhile. You can't just start charging 100/hr without some type of expertise or reputation to back it up. Thanks for your comment!

  • Sazboom Software

    Rob, competing on price need not be a 'race to the bottom' if you have ways of finding efficiencies that can reduce your costs without cutting quality. Finding a way to make something less expensive is not necessarily the same as making something cheaply, and if you want to enter a crowded market finding a way to cut costs and pass on those savings to the customer is a great way to do it.

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  • Vincent Roman

    Nice article. I like it … Above and beyond this you might want to think about historical and cultural implication son people's reaction to price, especially at the upper range of the scale. Anyhow, thanks for the food for thought :)

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