By: Lexie Newhouse
John Ray of Ray Business Advisors LLC tackled the myths of pricing with Georgia State students at the LaunchGSU incubator for “Price Effectively or Die: Pricing for Startups.” From his external CFO business advisory duties to interviewing local business owners on the Business RadioX podcast series, he offered years of experience and insight for students searching for pricing solutions.
Ray outlined common pricing mistakes like basing price on emotion, exclusively on competition, or business costs alone. With the customer at the forefront of pricing, he also noted the detriment of not involving customers in a pricing conversation.
“Pricing is the most important decision you’ll make in your business,” said Ray. One common misconception that he addressed was cutting pricing to attract more customers. Ray argued that price increases are the solution, not price cuts, where a one percent price raise increased the bottom line by nine percent on average.
He shared an example of a piano teacher. After experiencing inconveniences with customers constantly rescheduling, she sent a bold letter to her clients outlining new cancellation policies and a price increase of 35 percent, all nonnegotiable terms. Despite such a price spike, she kept all but one of her clients. Ray illustrated the client perspective with their perception of value, proving that her value ultimately outweighed the increased price tag.
“Customers aren’t price sensitive; they’re value sensitive,” emphasized Ray. Customers’ price sensitivity along with believing in a set market price, that all customers should pay the same price, and that the price must be reduced to gain market share were common pricing myths that Ray also addressed. He derived the customer’s value equation as the benefits customers perceive minus the price equals the value customers receive.
Fulfillment, identity, nostalgia, enhancement, ritual, and indulgence were identified by Ray as key valued benefits perceived by customers. Holding up two cans of chili, Ray illustrated the difference between Hormel Chili versus Skyline Chili where customers perceive the value of Hormel as a cheap meal versus Skyline as nostalgia and identity. Those values ultimately dictate what customers are willing to pay.
This introduced the idea of price signaling. One example Ray shared was a wood worker that participated in craft fairs. One Saturday, he attempted selling his hand-crafted crosses for 40 to 50 dollars. Unsuccessful, a neighboring craft fair booth vendor suggested marking up his prices to 125 to 150 dollars the following day. That Sunday, he sold out, where the dramatic price increase ultimately led to positive results. Here the cheaper price signaled inferior quality, emphasizing the importance of price representing value and quality.
Along with signaling, he also noted the importance of differentiating clients by values. “You can differentiate anything,” said Ray, offering an example of a marketing a security camera versus a baby monitor. Despite offering the same features, the baby monitor was significantly more expensive due to the differentiation and market with cautious mothers and their newborn babies.
In dealing with B2B pricing, conversations are key. “‘Why?’ is a great question. You learn a lot when you ask ‘Why?’ versus ‘Yes or No?’,” said Ray. Learning about customers’ explicit needs and implicit wants allows businesses to better leverage customer values and build the company’s credibility. B2C relationships focus more so on brief questions to develop customer personas, opposed to B2B’s emphasis on the actual relationship building.
“Go raise your price this afternoon by 1 percent,” Ray continued, “Raise your price until you hear squeals.” He shared that 20 percent of customers making spending decisions actually experience physical pain when writing that check or swiping their credit card. “Don’t be afraid of rejection if you lose that 20 percent when you increase your price,” Ray said in response.
In closing, Ray shared that “Your ability to diagnose, communicate, and price your value to clients determines everything.” His tips on price and its ability to change the bottom line of a business helped students gain a better understanding of what pricing structures best fit their business models. “Georgia State students,” said Ray, “they’re not just business students,” recognizing the importance of diversity of facilitating those customer conversations to identify diversified and differentiated values.
To learn more about upcoming LaunchGSU events, visit launch.gsu.edu!