Pricing Strategist Home / Pricing Strategist
We strongly believe business finance is a common-sense subject which needs to be used whilst pricing. Unfortunately, many experts have complicated it using jargon which confuses people with no or little financial background. This makes people in business unconvincingly implement pricing strategies they have known or heard failing to look things from a customer perspective.
Chinmay will help you to gain insights about:
- Critical things to consider when setting a price
- Factors that affect pricing
- How to bundle and package
- Developing value based pricing model for your business
Here’s an interaction between Chinmay and one of his clients (Café owner) in regards to pricing. This is a common scenario that Chinmay experience with most of his clients.
Café owner (let us call him Peter) gave a cup of coffee to Chinmay and started the one-to- one session.
Chinmay: Peter, thank you for the coffee. I am curious to know at what price you sell each cup of coffee?
Peter: It is sold for $4.50
Chinmay: How did you come up with the price?
Peter: I was being smart, Chinmay?
Chinmay: Tell me, I can’t wait to hear!
Peter: I went around the neighbourhood and slowly pinched the pricelist of my competitors. I compared all their prices before I came up with $4.50
Chinmay (In his mind): How on earth do you know the expenses and liabilities of your competitors???
Anyway, Chinmay did not want to lose his client so he continued the conversation without confronting Peter.
Chinmay: Peter, I hope you are selling coffees to make profit?
Peter: Of course!
Chinmay: How much profit do you think you are making on each cup of coffee?
Peter pulls out his laptop and opens an excel sheet.
Peter: Chinmay, here it is.
$0.50 cents is the cost of ingredients – coffee powder, milk and sugar
$1.00 for the rent
$2.00 for other overheads like wages, electricity, admin expense and others
So, I should be making $1.00 profit.
Chinmay takes Peter cafes financial statements and breaks down all numbers to find out that for the last six months Peter was making -$1.27 on each cup of coffee sold.
Peter: How is it possible Chinmay?
Chinmay: “Numbers don’t lie” Peter. Take a look for yourself.
Peter goes through the calculations. He is bit offended even though that was not Chinmay’s intention. With a dominating tone he asks – “Chinmay are you suggesting me to sell coffee for $6 or $8 and still expect people to buy from me?”
Chinmay: Peter that is not what I am trying to convey. First, we have to understand our industry. Your cafe is one among several hundred cafes in Melbourne which is coffee capital of Australia. Whether you like it or not, the market dictates the price.
Peter, let us park this conversation aside and understand proven strategies used by successful businesses similar to your industry.
Peter (with reluctant voice): ok, go ahead.
Chinmay: Have you ever gone to McDonalds and bought only a burger?
Peter: Only a burger? No. They always sell it with fries and drinks.
Chinmay: Exactly, they always upsell with fries, cookies and sugar water.
Burger is way to get people inside their store. The operating profit on burger is 5-6%. However on fries and cookies it is 3-4 times more. And on sugar water which costs them $0.05 cents, it is sold for $3.50.
In your café, coffee is the way to get people inside the door. Do you upsell them with cookies or cakes?
Pricing is simple. You have to calculate how much each product is costing the business. This should include all variable and fixed costs. Then add profit on each product and service sold. However, if you want to leverage then you should add lots of VALUE to it.
What successful business does is not just coming with a right price but knowing how to bundle and package them, and on top of it show VALUE to their customers.
Dear reader, do you know which product and services sold by your business are like burgers, cookies, fries and sugar water?
“Business is not just about turnover, it is all about what is left over.” - Anonymous