Pricing – deciding how much to charge by looking at pricing and value from the customers' point of view

Pricing policy has both an immediate and long-term impact on a creative business and has an impact not only on the economics of the enterprise but also on the perception of its products and/or services.

Prices can be derived from costs and this is a useful exercise to do, though it’s not the only way to decide how much to charge. All the direct costs must be included of course, including the cost of labour. More difficult to calculate is a proportion of the indirect costs that should be allocated to products and services – in other words, how much should the sale of each item contribute to the overheads of the business? There is no exact way to do this but there are conventions of management accountancy which help. Whatever method you use, income from sales must be sufficient to cover both the direct and indirect costs of producing goods or services.

Distributors and retailers are part of the marketing and pricing equation, so building in an attractive profit margin can help to incentivise such partners to promote your products. Or to put it another way: if the price doesn’t produce a profit for your distributors, you won’t sell your product.

This way of calculating pricing ‘from costs upwards’ is useful for establishing a minimum price, but doesn’t in any way indicate a maximum. We need to take a look at pricing from the other end – in other words from the customers’ point of view rather than the producer’s.

The price customers are willing to pay for a service or product equates much more closely with its value to them rather than what it cost you to create and deliver it. So pricing is about the customer’s perception of value. If customers are willing to pay £40,000 for a Hastens bed, or $100m for Damien Hurst’s Diamond Skull, then that’s what it’s worth to them.

Pricing is not just about the economics of the business; it’s also intimately connected with customer perception and the enterprise’s position in the market place.

This way of thinking of value from the customers’ point of view leads to new insights about what in fact the customer is actually buying. Often it’s status, experience, a story, hope, or conspicuous consumption. A Harley Davidson executive famously said (according to Tom Peters): “What we sell is the ability for a 43 year old accountant to dress in black leather, ride through small towns, and have people be afraid of him.” Because the Harley Davidson people know exactly what they are selling (or to be more precise, what customers are really buying) they can set their prices accordingly. Their motor bikes are much more expensive than Honda’s because they are selling an image, not a means of transportation. The Victoria and Albert Museum was once advertised with the slogan “An ace caff, with quite a nice museum attached”.

Once we fully understand what the customer is buying, we can set the prices accordingly.

Another aspect of pricing is the degree to which we are selling our intellectual property – or licensing it. Just as an original painting is more expensive than a limited edition print, selling the intellectual property in a painting, design or a piece of music will command a much higher price than selling a license to use or reproduce it. The seller and buyer both need to know what they are selling and buying in terms of the intellectual property associated with the sale.

Devising a pricing policy is one of the most important decisions creative entrepreneurs make about their businesses. Pricing has significant consequences not only on short term income but the long term perception of the business and the goods or services it creates.

Copyright © David Parrish 2009. www.davidparrish.com