Insight Associates provide outsourced accounting and Finance Director services to ambitious and growing businesses. We work as your only resource or with existing staff to give you complete financial support including monthly management accounts, high level financial advice, robust controls and financial systems, funding and business planning, payroll & compliance, VAT returns and statutory compliance.

Successful business leaders have all the information they need to make good decisions…Do You?

Wednesday, July 12, 2017

Is Your Pricing Wrong?

A few weeks ago my wife and I spent a few days in Tuscany, visiting our friend Heather, who had recently moved from the UK to a very old Italian house, high up in the mountains.

The break was unlike anything we would normally do, and we loved it. We spent time walking, visiting the ancient walled city of Lucca and generally enjoying the few days of slowing down. We drank too much (very inexpensive) wine and took in the wonderful environment.

Of course we will enjoy the memories for years to come. But now that I’m back in the work context, I can’t help thinking about a slightly different part of my holiday – the experience of booking it.

The list of possible flights on was very long – and the pricing was intricate. Not only was every airline priced differently depending on whether they were budget or premium, but each day, each flight and of course each class was priced differently, too.

Just to make things even more difficult, many of these prices changed from minute to minute.

It took a while to work out the best option. Naturally I was annoyed to discover that some of the lower prices that were available when I first started looking had disappeared by the time I booked…

Airline pricing is notoriously complex. They broadly determine what they are going to charge based on how they are positioned in the market, what their competition is charging, what the market will bear and their own costs.

Then, that is fine-tuned with an algorithm that – naturally - is designed to ensure that they collect the maximum revenue possible for each flight.

I won’t go into the whole system here, because it will make your head spin. Suffice to say that there are multiple fare levels (often for the same seat…..) and the algorithm changes the pricing in real-time, depending on how sales are going in each category.

It is all very strategic.

How many businesses can say that their own prices are as carefully calculated?

Some certainly can.

But here’s what I see more often: Businesses that set their prices randomly several years ago, based on their owner’s gut instinct or because that was all they dared charge at the time.

Later on, they try to adjust their prices, but that original price point is always their anchor.

So for example, you might raise prices by 15%, which seems like an enormous hike. The problem is that if your starting point was not thought out properly, your pricing still won’t make any sense.

You might still not be charging as much as your competitors…. Your pricing might still not reflect the full value you deliver…. Or you may still be placing yourself at the lower or middle end of the market, whilst in reality you’d be better off right at the top.

This hobbles your business, completely unnecessarily.

So here’s a useful exercise. 

Sit down and calculate what your prices should be – entirely from scratch, without referencing in any way what your prices are at the moment. Pretend, if necessary, that you’re just starting your business again.

Think about all the same factors as those airlines do – positioning, your own costs, your market and your competition - and determine what the right price really is for your product or service.

You will probably be shocked by the difference between what you should be charging, and what you actually are.

Like all financial matters, your pricing should be conscious, deliberate and strategic – not just be allowed to roll along with a bit of tinkering here and there.

If pricing is an issue for your company, let’s talk. We can help ensure that you are charging correctly, so that you bring in the income that you need and that you deserve.

The last thing you want to do is to get stuck with historic prices you don’t understand.

Those of you who know me will be shocked that I’ve written about planes and not trains. So rest assured, I’ve got a blog planned about pricing and trains as well :)

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