How to set prices that drive growth

In this post, Lawrence Wilson of Hedingham Sales Training and Coaching Ltd explains how to set fair prices, why you should avoid copying your competitors' pricing and the different pricing models available to your business.

I'm asked three questions time and again on the topic of pricing, which is a perennial challenge for many, if not all, small businesses operating in London's service sector.

The questions are:

• How do I escape the spiral of discounting known as the "race to the bottom"?

• How do I set my prices so that I'm fairly compensated for my time and effort?

• Why can't I just research what my competitors are charging and copy them?

This blog sets out the fundamentals of developing a winning pricing strategy, based not on guesswork or "copying" competitors, but on consumer psychology and your business' unique proposition.

It also elaborates on how to set your price and describes pricing models you may never have considered – ones with the potential to unlock lucrative new revenue streams and help you stay ahead of the pack.

Why do customers buy?

Let's start by understanding what motivates our customers to buy from us in the first place.

You can group customer motivations into two main types:

1. Towards motivation.

2. Away motivation.

This psychological framework distinguishes individuals who are driven primarily by the pursuit of pleasure from those driven to avoid pain.

Research indicates that around 80% of people are mainly motivated by the desire to avoid pain, while only about 20% are primarily inspired by the pursuit of pleasure.

Why is this important? You must show the consumer that they have more to gain than lose by investing in your solution. If you don't, you could lose the sale or be forced into heavy discounting.

In contrast, if you can demonstrate your value through credibility, likeability, trustworthiness and expertise, you can command a high price for your services.

Relational v transactional

Service businesses that operate on a relational basis with their clients (versus transactional) can command much higher fees than those that don't.

Why is this? It's because these problems are costing the client a significant amount of money, time or effort to justify the investment of solving them.

A transactional business model is a short-term, one-time exchange without deeper collaboration with clients – such as selling them a single piece of equipment.

If yours is a transactional business model, think about how to develop or add a relational business model to unlock higher fees.

Every sector has the potential for a relational business model – don't be afraid to get creative, research ideas and test out ideas from other sectors.

For example, a health supplements store in London might also test for allergies and provide one-to-one nutritional advice.

Differentiation

Service businesses in London that have a differentiated offering are more sustainable, can earn higher fees and are able to weather storms in the economy.

Simply put, if you can't articulate in a few words why your customers should buy from you instead of your competition, you might need to work harder on your value proposition (or more accurately, the customers' value and your proposition).

Is it your responsiveness? Your customer service? If so, which aspect (knowledge, training of your staff, ability to deal with difficult situations)?

• Your technical expertise on a particular subject?

• Your location?

• Your ability to service a particular niche or segment?

Testimonials and customer feedback can give you the answers if you ask for them at the right time and in the right way.

You could also ask if they know anyone else who's experiencing the same problems and obtain a referral through a referral system.

Cost-plus pricing

Cost-plus pricing is a widely used strategy across many industries because it's simple and clear. At its core, the cost-plus formula is easy to understand:

Selling price = cost of production + markup

The cost of production includes every expense required to create or deliver the offering. These costs may include:

• Raw materials.

• Labour.

• Utilities.

• Equipment.

• Overheads.

• Any indirect expenses tied to operations.

Once the total cost is established, a markup percentage is added.

One limitation of this approach is that it overlooks market demand and customer preferences.

When prices are based only on internal costs, a business may set rates that fail to align with what buyers are willing to pay or what competitors are offering.

This can result in prices that are either too high to attract customers or too low to sustain healthy profits.

In addition, cost-plus pricing relies on the assumption that production costs accurately represent the value of the product or service.

Value-based pricing

Value-based or market-orientated pricing focuses on setting prices according to the perceived value of a product or service in the eyes of the customer, rather than simply adding a markup to costs.

This approach takes into account factors such as:

• Market demand.

• Customer expectations.

• Competitor pricing.

• The unique benefits your offering provides.

The goal is to align your price with what your target audience believes your product is worth, reflecting its quality, brand reputation and emotional appeal.

For businesses in competitive or premium markets, value-based pricing helps to capture higher margins and strengthen brand positioning.

This is because customers are often willing to pay more for products or services that deliver distinctive value or offer a substantial return on investment.

Think about the range of prices that you're prepared to accept, from low to high.

Ultimately, the key is to price strategically: cover your costs, pay yourself fairly and leave enough margin to weather the inevitable peaks and troughs of your growth journey.

Tiered pricing

Tiered pricing is a strategy where, instead of offering a single service at one price, you present multiple packages at different price points – often called "gold-silver-bronze" pricing.

This model works particularly well when services are bundled into set packages, such as monthly retainers or fixed-price offerings, rather than billed hourly.

Maybe you're offering woodworking classes in London and want to offer different services, such as one-to-one time with the tutor or access to certain types of materials, equipment or group activities and workshops/outings.

Typically, you create three tiers:

1. Bronze (basic): covers essential features or entry-level services. It's designed to protect your time while providing an accessible option.

2. Silver (standard): your core offering and ideal price point – likely to be the most popular tier.

3. Gold (premium): the top-tier package that includes all features and exclusive benefits. It appeals to clients seeking the highest value and is often your most profitable option.

By presenting options rather than a single price, tiered pricing empowers clients to choose a package that best fits their needs and budget.

It also helps businesses increase perceived value, attract a wider range of clients and naturally guide buyers toward the most balanced middle option – your sweet spot for consistent revenue.

Tiered pricing works best with a diverse audience that has varying needs and budgets.

However, if a small business serves a very narrow or limited group – such as a niche B2B consultancy with only a handful of clients – multiple tiers may distract unnecessarily and lead to underselling your services.

Subscription revenue

The subscription model is a business model where customers pay a recurring fee at regular intervals (such as monthly or annually) in exchange for access to a product or service.

The beauty of subscription revenue is that it's predictable, which makes it easier to manage your business and plan for growth. Subscription revenue can also add significant value to your business on exit.

Many businesses have the potential to introduce a subscription model. One of the more imaginative cases I heard was a shop selling running shoes that also offered regular classes to long-distance runners to help them improve their times.

You may well have spotted that this is the relational model combined with the subscription model – increasing fees and creating ongoing, predictable revenue streams.

Don't copy the competition

Be careful not to just copy and paste what your competitors are doing, as there are hidden dangers in that approach.

Competitors may have lower operating costs, bulk purchasing power or better supplier agreements.

If you match their prices without evaluating your expenses, you risk selling at little or no profit or even at a loss.

Competitors may serve a different segment of the market and their customers may be more price-sensitive or value-driven than yours.

In addition, your competitors may include features, warranties or service levels that you don't.

Matching their price without matching their value can make your offering look inferior, causing customers to choose the competitor over you.

Research your competition thoroughly, understand their strengths and exploit their weaknesses. But don't become blindsided or distracted by them.

Instead, focus on how you differentiate your product or service and deliver value to your own customers.

Conclusion

In summary, I've highlighted why customers buy from you in the first place and how to set your prices and get paid for the value you provide your client.

I've also shared some key principles that underpin delivering that value, including your market differentiation, thinking about how to adopt or include a relational business model and the hidden dangers that lurk in simply copying what your competition does.

If your clients have more predictable requirements, tiered pricing can work well. If you dream of sales while you sleep, you should seriously consider a subscription model.

Finally, have fun with it. Get creative and think outside the box.

Be the vanguard of your sector by innovating with your business model and testing new ideas rather than languishing behind and following the crowd.

Read more

• Pricing your product

• Cost-based vs. value-based pricing: Which is right for you?

• Pricing your products for profit [WEBINAR]

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