How to put a price on your business Anne-Marie Gaganis, the owner of boutique Whistles. Picture: Noelle Bobrige Source: National Features LIKE any good Jedi, business owners are being told to "unlearn" the pricing mistakes of the past. Relying on cost to calculate price is the first mistake, Pricing Insights managing director Ron Wood says, a mistake that could well sell you and your business short. "If you decide on making 50 (percentage) points on your line and something costs you 10 on an assumed volume, you would be selling it for 20 - but it could be worth $10," he says. It's a default mechanism. Business owners should instead be looking at the value of their product or service, he says. The best model Pricing Prophets managing director Jon Manning says a healthy cash flow is the crucial outcome of the right pricing structure, whether it is based on subscriptions, rentals or a combination. "The beauty of selling subscriptions are numerous, including the ability to 'sell once and renew many', lower perceived price points, greater segmentation opportunities and revenue that forms an annuity rather than a lump sum payment," Manning says. (Rentals allow) customers to upgrade to new and improved models as soon as they are released and allow you to retain ownership. Selling goods as a service offers a hybrid between subscriptions and rentals, he says. Airlines don't buy engines for their planes - they pay for every hour they are used. This makes it easier to "sell" as the benefits are enjoyed only when the customer is earning revenue, Manning says. "But the best models mix these up," he says. Subscriptions can be accompanied by usage charges, for example. Solving problems Wood says business owners should work out the economic value their product generates for a customer. "If you are making industrial saw blades, cheap imports may only cost 30 per cent of your price but be of lower quality," he says. They may be able to cut 30m and not 100m, so your customer will actually need to spend much more with the cheaper product. Look for your customers' time frames and how and when they buy to properly analyse the value your product brings, he says. This explains why the same bottle of water is priced at $3.50 at a petrol station, $2.50 at a convenience story and less than $1 at a supermarket - and why businesses may pay 7-10 times more for a rushed delivery or to guarantee delivery. This process also becomes the basis of being able to sell the benefits - for the right price. Pockets of value Unbundling services can also deliver value. Snacks, choice of seats, priority check-in, additional luggage - all of these used to be included in the price of an airline ticket but are today charged separately. The same thing can be done by offering options to customers, Wood says. "Very few businesses segment their customer choices," he says. When you do - say lite, standard and deluxe packages - it allows consumers to trade up or down. And if you position (your business offering) on price, the natural tendency is to challenge that price or go elsewhere. So don't offer linear pricing. Long tails Try a geographic area or a specific customer type to test price changes, but avoid the "big, big rollout," Wood says. Bulk sellers should protect the top 30 per cent of their products from competition and move the next 50 per cent only about 5 per cent after testing. However the bottom 20 per cent offers the best potential, Wood says. You can really find opportunity in the long tail, up to 40 per cent price increases. These products have low turnovers, but people are committed to the purchase - meaning price increases are likely to have limited fallout but significant upside. NOT every business has the ability to easily set prices. Retail has been battered by savvy internet shoppers and the rise of consumer conservatism. The owner of Adelaide boutique Whistles, Anne-Marie Gaganis, says her successful business relies on good, loyal customers - which requires a balancing act between honouring recommended retail prices and matching internet sale prices. "If a garment is on sale on the internet and the customer asks us to match it, then it depends on what the garment is for us to decide whether we will," she says. She admits a loss is sometimes made on internet-matched products - but it also helps build a better and more loyal client base.