I have said it and written it repeatedly – customers don’t care about your costs. They care about the value of your price compared to their next best alternative. You can’t set high prices just because your costs are high. That said, if your costs decrease and your customers know it, they will often view the decrease as leverage to request lower prices. Don’t assume you need to grant their wish.
Pricing power is a simple concept. It really reflects the ability of the selling entity to set or raise prices to the point where they capture the value provided to the buyer. I have written about the USWNT players’ personal pricing power and pricing power in healthcare, however, occasionally there are external factors that seem to limit a company’s ability to use their pricing power. When that situation occurs, remember there are multiple components of price – the value you capture is not limited to the price of your product or service.
I have had several conversations recently with potential clients who want help in setting their pricing strategies. When asked what their current pricing strategies are, the most common answers have been, “We do it by gut feel” or “We take last year’s price and adjust it for our cost changes.” My second question is always, “What is your business strategy?” The answers to that question vary more widely. Although I ask that question second, it is more important and must be answered before setting pricing strategies.