As I’ve mentioned before, effective pricing involves much more than simply adding up your costs and multiplying by some desired target margin.
Not only does this method fail to account for the value different customers can place on the same products, it also fails to address the level of profitability different customers deliver to your business.
Just as not all products and services are created equal, not all customers are created equal. And, as odd as it may sound, you need to take your customers into account when you set your prices—not just their ability to pay, but the costs involved in doing business with them.
Imagine that your company sells to two customers: A and B.
Customer A buys regularly and in high volumes. Her business is profitable for your company. A also has a partnership mentality and works with you to solve problems when they arise. A always pays on time and is very pleasant to deal with. The time and hassle expended on managing your relationship with A, in other words, is minimal.
Customer B, on the other hand, buys sporadically and in smaller quantities than A. The low prices he gets, along with his demands for high performance and free support, mean that your company earns little or no net profit from him.
B’s mentality is transactional—he is always threatening to jump ship for anyone who offers him a lower price. To make matters even worse, he pays late and has unrealistic performance expectations. You and your team spend a lot of time trying to keep B even moderately happy—to no avail.
This is an extreme example, of course, but you see what I’m getting at. Should these two customers be paying the same price for the same product or service?
Since Customer B is a far more expensive customer, B should be paying higher prices.
Ironically, the customers who pay less tend to be a lot more “Type B” than the customers who happily pay a premium to buy from you. The good news is that the better you get at pricing, the more you can afford to ditch Customer B and his ilk altogether.
But that’s a blog post for another day.