Why Unilateral Pricing Approaches Fail
In my last blog article, I wrote about how a one-size-fits-all model for pricing doesn’t work for businesses. The unilateral approach can’t overcome two obstacles: differentiation in what the company sells and disregard for the developmental stage the company is in. These two factors must be considered before effective pricing models can be developed.
Let me give you a couple of examples of how this plays out. Let’s say you have two companies, one that produces some kind of thing (like food) and another that provides a service (like photography), and the method of pricing you’ve subscribed to is based on where the company sits in the competitive set.
Let’s say your product is catering. You price your menu for prime rib and fish at around the average for the other caterers on the preferred vendor lists for the venues you compete over in your market. Makes sense if you want to appeal to your clientele. If you all buy the food from the same suppliers, find your culinary and service staff from the same talent pool, and rent your kitchen space in the same areas, you will likely be able to sell your menus at about the same price to prospective consumers.
Let’s say, however, you decide to buy local and organic product, hire a talented chef and experienced (and expensive) cooks and servers, and you rent a kitchen that’s near your house (convenience) and costs a lot more than commercial kitchens closer to the venue. Now your costs are higher than your competitors on product, labor and overhead.
In this catering company example, you must either lose profit margin compared to competitive set (keep prices the same but spend more to make the same in sales), or you must raise prices to cover your increased costs (to make enough money to keep you in business).
The key takeaway from the product-based company example is that the costs of materials, labor and overhead are what drive the price, much more so than anything else.
Let’s switch gears to the photographer, our service-based company. Like the caterer, you want to take the approach of pricing compared to your competitors. You know that there are five other competitors in the marketplace who are about as good as you at delivering quality photographs for clients. You decide to price yourself around the same as the others, even though they are just starting out in the industry and don’t have nearly the experience and people skills you do (making your work smoother and more fun than the competitors). Different from the product-based caterer, you have the flexibility to charge almost anything you want, because your ongoing product costs are relatively low and you can reduce your overhead to a computer in your house.
As a photographer, you do face some out of pocket costs for delivering your product, but most of the “cost” of doing business is your time. Time to meet with clients, time to put together proposals, time to shoot on the day of the wedding, time to process/edit the images, time to organize an album, time to meet again with the clients and time to order and deliver their tangible takeaways.
In the service-driven business, time is the commodity that matters most.
Time is the most precious and limited resource you have in your business, especially considering peaking needs in most annual cycles. Most businesses, and especially weddings, are seasonal in nature, and have high- and low-demand periods. If you own a catering company you can logistically meet all the peaking demands by doing multiple events on the same day by scheduling a swing or graveyard shift in your kitchen to produce the food and then hire part-time or temp labor to serve it the next day.
If you’re a photographer, you can’t do this – you are the only one who has the ability to deliver the services you’ve sold to the client – and so can only do one wedding a day. Even if you could book three weddings in a Friday-Sunday stretch, you’d likely show fatigue and deliver subpar services for the Sunday client, and so you are even more limited on the number of days you can sell your services. Two days a week is about all you have realistically to charge for new services.
The limitation of your time-based company to deliver more services during high-demand days is largely what separates you from the caterers, florists, stationers and other product-based. These business types can scale to meet peaking needs, while you can’t. Who else falls into the time-based companies? Wedding coordinators (different than full planning services), DJs, bands, venues and equipment renters all have a finite amount of resources that can be depleted and sell their services largely based on the cost and availability of time. Weddings don’t occur at all hours of the day, and a band can’t perform at two parties in two different venues. You simply can’t scale your business during peaking periods.
Okay, that’s a lot of logic and reasoning, there. Plato would be proud! Let’s put the rest on hold for next time. In this post, I wanted to bust the myth that unilateral approaches to pricing apply across the board unilaterally well. More importantly, I wanted to lay out how I came up with what elements determine which kind of company you are. We discussed the product- and time-based businesses, but have not yet gotten into the third: Contribution-based. These are the enterprises that create measurable value to a project or immeasurable value to the entire experience.
I’ll spend more time in the next post discussing all three kinds of businesses in more detail, as well as how they differ from each other. After we learn about the three models, we’ll explore how the developmental stage of your business impact pricing strategy and tactics.