Video: Pricing (Off the Top of My Head)
One of the biggest challenges when you're running a business is how to price your products or services.
In this episode of Off the Top of My Head Matthew Rempel goes over some of the factors that social enterprise managers should consider when setting their prices.
Host - Matthew Rempel
Editing - Kailan Janzen
If you have questions that you'd like answered in a future episode, please comment on Youtube with your question and tag us!
If you would like some support while creating a social enterprise, Strategy Made Simple can help. We provide coaching, consulting, and workshops to help social enterprise teams get on the same page and move their ideas forward. If you or your team need help, please contact Matthew Rempel at Matthew@StrategyMadeSimple.ca
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Email: info@strategymadesimple.ca
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Transcript:
Kailan Janzen (00:00):
Hey, Matt?
Matthew Rempel (00:01):
Yeah, what's up Kailan?
Kailan Janzen (00:03):
I got a question. How do I price things?
Matthew Rempel (00:07):
Okay. Okay, so pricing
(00:15):
Okay. First things first. In social enterprise, don't be the cheapest option. Let's start there. Being the cheapest is not the best way of pricing. There are some pricing strategies that use low prices, but being the cheapest is usually a great way to not be in business later on. Now, the exceptions, you can use low pricing to enter a market or to expand your influence in a particular market, but usually that's a way to start gaining customers and to establish yourself. Then you raise prices to a more feasible price, feasible being on your business end. You have enough to cover your costs and your overhead and have a little bit left over for uncertainty and planning for the future. Because in social enterprise, profit isn't meant to be siphoned off to some owner somewhere, but you do need profit to be able to do more or to weather uncertainty because I mean, we all know the Covid pandemic came businesses that didn't have cash available to sit on and to wait it out or to adjust.
(01:24):
They didn't survive as organizations. So you need to have some profit built into your model to be able to do that. So that was 0.1. Now, pricing for a social enterprise is a little bit more complicated if the people you're trying to impact are the customers, because then especially if your focus impact group is low income, you can't charge premium prices. It doesn't work with the model because then they're not going to be able to afford it. They're not going to be able to buy the product that makes the impact. You have to either allow a cheaper option for them to still receive the product and the benefits and the impact they're in, or you need to package it in such a way that it's still accessible regardless what the price is. That could mean having a third party subsidizing it. That could mean getting grants from governments or other foundations or philanthropic bodies.
(02:17):
But if the impact group you're trying to affect are your customers, you have to ride the line a lot more, especially if they're low income. This kind of flips on its head. If the impact group you're trying to affect are the people working within the organization, because then you can charge premium prices for a premium product. You can go and find the people who have the ability to pay and evaluate highly enough to pay a premium price, because in those situations, if the impact comes from within the organization by doing more work, you make more impact, then high prices are great. High margin is fantastic because then you can afford to do more work. You can afford to expand into new markets. If your employment model is the way you're making impact and you're selling to large mega corps that can afford to pay for this, the product or service you're creating and the cost of the impact that goes into it, charge them.
(03:12):
They have the ability to pay. They're not the impact group, so they aren't going to suffer for having to pay that because they have the choice between other things in the market. That's part of the big deal of social enterprise. We're using market forces, so be in the market, occupy a position that allows you to charge what you're worth, so you're allowed to charge high prices. You're allowed to be the most expensive thing in the market as long as people care about what you're doing and see you as the first choice. The pricing scheme works, so if you've got any questions about pricing schemes, we might be able to help you get some resources. Leave a comment down below and we'll see if we can help Be super easy to you. Passionate invest. It's super easy. It edit well. The reason I'm passionate about, it's because I've had so many people I've had to work with to try to get out of this mindset that you have to be the cheapest.
(04:03):
It makes me so frustrated to see good organizations just shooting themselves in the foot because they are not willing to charge with their worth. It's a lot of people are stuck in a nonprofit mindset. They're not allowed to earn profits. Even though even in nonprofits, you're still allowed to earn profit. It's just called surplus. Just people aren't used to thinking this way. People are stuck feeling like we can't afford things, so we shouldn't charge people as much. It's the idea that if you're working somewhere but you wouldn't be able to afford what you make, but extend it on an organizational scale, which makes it difficult to operate, it makes it difficult to just exist as an organization. If you refuse to price things that the value people give them. It's difficult to exist as an organization if you're not willing to charge the customer what they're willing to pay for the value you're making.
(05:06):
So if you're looking for a system of how to set prices, there's a bunch of different ways to go about it. You can use cost plus. You can use value-based pricing, which is my personal favorites, if you can get away with it. You can also go with just commodity-based pricing. If you're selling something that's not particularly unique, that can be substituted easily. It's something like corn is often used as an example because it's a is a corn, is a corn. It's hard to sell something that is the same at a different price. So those are three methods of setting pricing. Pricing strategies is a whole nother mess because as I mentioned earlier on, there's market entry pricing when you're trying to price low, get people used to using you get people accustomed to you as default, but then there's value capture pricing. Often when you hear of capitalists of run amok, value capture pricing is what people are talking about.
(05:59):
Price gouging trying to make a monopoly so you can charge whatever the heck you want. Really bad examples of this are pharmaceutical companies out in the US When we hear about people's insulin costing as much as a month of rent, that is the value capture pricing at its worst, but you can still use it to earn the value that you've created just without going to that extreme. There's a way in between there. If you are at a stable place where you've got some reliable customers, they keep coming back, you've got something that people want and they want on a regular basis. Cost plus pricing can be great because then it says we have certain costs. We're counting the costs to make the thing and then the costs to be in business, the fixed costs, and then we add a percentage on top that allow us to have the flexibility to do things differently next time or to adjust if things go sideways to pivot.
(06:57):
If all of a sudden the business model doesn't work, then we have time based on that margin, and it also allows you to grow and do more with that margin. That's where cost plus tends to be most useful in those stable situations. So one of the ideas I mentioned earlier was value-based pricing. That's another strategy you can use to price your products and services based on the value that individual customers are going to get out of it. The value people get differs vastly depending on their personal situation. If you're selling horse riding lessons, for example, there's a small group of people that find that extremely valuable and then a lot of people who do not care. And so you can't price it for everyone. You should focus on the people who do care and what they're willing to pay within that group that is willing to pay and do value it.
(07:42):
There's going to be a massive difference between the people who want it the most and the people who are only kind of interested. Build your products and services with those different groups in mind because then you can price it differently. Give a full service option for the people who want it all and give a bargain option. The one hour, the half hour lesson. For the people who only want an intro who aren't quite committed yet or who aren't quite sure if they care in that way, you can allow for a price that covers the largest group that care, and you can make sure you're serving people well at the price or at the value that they get from it. And this is even more important for when you're selling to businesses or organizations because not all organizations are like yours. They might have a totally different financial situation.
(08:30):
So let's look at graphic design as a service, for example, for other organizations, a graphic designer working for Coca-Cola is going to get paid on contract way more than a designer working for a mom and pop shop who only has one in-person location at some corner store because the value they get out of it and the bundle of guarantees and services that you're providing are vastly different. Coca-Cola needs guarantees. They need background research and they're willing to pay for the premium of those things. A mom and pop shop, they probably want a logo, they want a flyer. Their basic needs are different, and so you have to price differently depending on who's getting the service and what value they're getting out of it.
Kailan Janzen (09:11):
How often should you change your prices on things?
Matthew Rempel (09:15):
You should definitely change your prices if you're losing on every sale because that's not sustainable as a business model, as an organization, technically, you can change at any time, although there is a reputational and administrative cost of changing prices, especially if you deal with physical product, because then you have to inform all the vendors who also sell it for you. You have to change all the listings on the sites. There's work that goes into changing prices, but especially if you're losing money on every sale, definitely change your prices, make it viable, and you have to think on the customer side too. The customer likes having regular, reliable, predictable prices for the things that they buy. Organizations like this, customers like this, and so when you're changing prices, it's best if you have a reason for the change. Either you're doing something differently, you're adding more value, and that makes it more expensive.
(10:06):
You're giving loyal customers a discount of some kind. Those are great ways to change your pricing. You can also look at keeping existing customers on the same price for a while and increasing it for new customers. That way, the people that are loyal to you become more loyal to you. The reputation that you have with them stays. You're able to build that relationship, that long-term relationship with the customer. Just with your pricing and the way you change it, and while you're changing your prices, make sure you communicate what that reason is. Often you'll see companies that are announcing new features or are expanding their offering or bundling things together, and that's what leads to a price change. Like everything else, your customer only knows as much as you tell them. So make sure you're communicating why the change is happening. Well, if you've got questions about your social enterprise and how you could look at your pricing, please email me info@strategymadesimple.ca, and we can set up a free coaching session. I'll give away two of these to people who are interested in being interviewed and being recorded about what they're going through and how they're going to look at their pricing. So again, info@strategymadesimple.ca, and then we can arrange a time.