Market Pricing’s Gravitational Pull

We know things exist, even if we’ve never seen them. We feel their effects. That’s how market pricing works.

If we understand forces that weigh on us, we can use tactical pricing towards our business strategy.

When customers buy services in a market they soon get a feel for what the going rate is.

Smart customers use market pricing as a guideline. A point from which to move their expectations up or down to match their situation. Market pricing’s gravity pulls customers expectations in line.

The rub is that customers’ market pricing comes -(drum roll)- from contractors.

We Are Not Alone

A contractor’s pricing is in a marketplace with competitors’ pricing. We fling our pricing into the RFP hat when a bid goes out. We change it from bid to bid to fit the opportunity, the facility, the customer, the geographic market – and our needs.

To make matters worse not all contractors price by the same rules. Remember falling down in disbelief when you heard a contracted price and you knew it was below labor costs? Ah, that’s another story.

Defining Market Pricing

In every marketplace there’s a range of prices that customers have bought. Customers don’t buy the same service at the same price from different contractors. There’s always variation.

It’s Variation in Pricing that Counts

There are always customers buying services at the high-end of the price range. Typically, this isn’t a large crowd.

And there are always customers buying at the low end. This is a bigger crowd.

But by far the biggest crowd is made up of customers buying services in the middle price range.

This bell-curve distribution of customers’ purchase prices is “market pricing”. Gravity is strongest here.

In some markets, there may only be cents separating the high from the middle from the low. Customers know this. That’s what counts.

Customers Don’t Buy Outside the Market

Contractors’ pricing can’t be double the market. No service differentiators justify customers paying that high a premium. At least no one’s found one to date. If they had, it would be copied immediately. And then become the norm.

Since contractors’ pricing must be in the market range, where in the range should it be?

Eating at the Premium End

There are (+) and (-) for eating at the premium end. It makes sense contractors want the high end, the (+) are very tempting. Here are a few (+)s & (-)s:

(+) Higher Profit Margins:

* Allows paying higher wages for better skills, training & more service

* Put more $s in contractors’ pockets at the end of the day

(+) Customers are:

* More likely to value your service – they’ll spend more to get more

* Less likely to bid out on a whim – your service is important to their business

* More demanding in a good way – force innovations, which can be used with other customers

* Great potential references – deliver first & they’ll sell for you

(-) Fewer customers buy at the top end – not enough revenue for contractors to live

(-) Greater sales effort needed to win – customers buy value solutions

Living in the Middle

The benefits in the middle aren’t as exciting as at the premium end. But they can make a sound business strategy into a solid business.

(+) Many opportunities for revenue growth

(+) Higher revenues lowers % of fixed G&A costs – new revenue doesn’t add G&A

(+) Easier to replace than premium end – securing replacements isn’t life threatening

(-) Sales effort can be as great as premimum-end

At the Bottom

It’s not risky to have some, but too many eats away stomach lining.

(+) Easier & faster sale – customers willing to overlook contractors’ shortcomings

(+) Large volume available – customers in survival mode are easy pickings for aggressive contractors

(-) If you’re not lowest, you’re out – 2nd lowest doesn’t get it (think WalMart)

(-) No room for costing mistakes – get it right, or pay the customer to serve them

(-) Customers turnover frequently – your contacts & contracts replaced for lowest price

How Does Your Market Pricing’s Gravity Feel?

You weighed down by gravity defying pricing? Share your stories about market pricing. Especially ones that defy gravity. Post your stories here.

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