Navigating Growth Through Pricing Strategy and Cost Analysis
Growth. It’s the goal of every business.
But how to achieve said growth? Now that’s the (multi) million-dollar question.
While “growth” may evoke images of unicorns like Airbnb and Uber that practically sprouted up overnight, the reality of entrepreneurship is that most of us can’t expect the same success.
For us non-unicorns, true growth—that is, sustainable growth—is built on the most basic business goal: sales. And for those sales to remain profitable and competitive, you need to price them appropriately.
Here’s the interesting part: A comparison of surveys shows that, although 85% of businesses know pricing is important, only 4% have a comprehensive strategy in place.
In other words? There’s a very good chance you’re leaving money on the table.
Literally.
Cost Analysis: Setting the Foundation
Before you jack up your prices hoping to capture more revenue, you’ll need to arm yourself with information.
Thus, the first step is to conduct a cost analysis. This involves asking three key questions: What, why, and how much?
- What is this cost analysis for? This narrows your focus so you can better calculate all applicable expenses (without cash flow white noise from other areas of your business).
- Why are we carrying out a cost analysis? This question aligns team members and provides solid growth-driven KPIs to shoot for. Data reads very differently depending on your goal—be that a price increase or discontinuing the service entirely.
- How much is the final cost? This includes direct and indirect expenses, as well as “intangible” costs such as reduced production capacity or falling customer satisfaction.
As you can see, answering the “cost question” is never straightforward. Some expenses are periodic one-offs; others might vary month by month. And how the heck do you put a dollar amount on customer satisfaction, anyway?
At the very least, you need to know the tangible costs of each service you offer before you can price it appropriately.
3 Ways to Know When the Price is Right—and When it’s Not
Let me be completely upfront with you—the following methods may not apply to your business.
Yes, these are the ‘best practices’ for determining a price point.
However, since we live in a digital age teeming with intangible (but very real) value, you’ll likely need some more specialized tools to find your ideal price point.
That said, let’s look at the fundamentals to give you a basis for doing so.
Method 1: Competitive Pricing
The most common pricing strategy? Look at your competition and then set prices from there.
How you adjust prices based on those competitors determines whether your approach is:
- Aggressive – Pricing below your competitors to snag their customers
- Cooperative – Matching their prices to maintain the status quo
- Dismissive – Deliberately ignoring competitors in your strategy
Of course, this tactic only works when you A) actually have competitors in your niche, and B) know those competitors’ prices.
Although useful, competitors shouldn’t be the foundation of your pricing strategy.
Method 2: Value-Based Pricing
Why pay $20k+ for a Rolex when a $20 watch can tell you the time just as well? Two words: perceived value.
Without delving into the labyrinth of sales psychology, the idea behind value-based pricing is to put a dollar amount on the uniqueness, the “secret sauce,” that only you bring to the space.
Thus, this pricing strategy isn’t limited by trivialities like ‘labor’ or ‘production costs.’ Rather, it centers on the immeasurable value inherent to your ideas and offerings.
If that sounds vague, well, that’s because it is.
Value-based pricing is inherently tricky since it’s not tied to cost analysis, but to your product and customer base. Leveraging this strategy demands effective leverage of:
- Customer feedback
- Strong target market knowledge
- Extensive pricing research and testing
Method 3: Cost-Plus Pricing
How profitable do you want to be? Setting your prices with this method essentially allows you to answer that question directly. Here’s how it works:
- Determine the costs of covering your goods and services
- Add a set percentage on top of that number
- Profit
It really is that simple.
The problem, ironically, also lies with its simplicity. Adding a flat percentage leaves little room for the finer nuance of pricing. Your best-selling stock or service will still only make as much as the benchwarmer.
In other words, you’re leaving plenty of profit potential untapped.
Find Your Inflection Point With a Fractional CFO
Growth is everyone’s goal—yet it’s a frustratingly elusive one. While setting a solid pricing strategy is an essential foundation, it’s really just the start.
If you want to get ahead of the 96% of companies that don’t have a comprehensive pricing strategy, fractional financial strategy may be your best bet.
With the flexibility to come in, organize your finances, and walk away after setting you up for success, a fractional CFO is the most logical choice to help develop a data-driven pricing strategy tailored to your unique offerings.
So if you’re looking for that level of financial leadership (without the overhead of filling a full-time executive position)…
Then what are we waiting for? Let’s talk.