The recent announcement by British Gas of a 12.5% price rise for electricity has caused a bit of excitement. Hardly surprising, when inflation is about 2.5% and (apparently) wholesale energy prices are dropping.
As always on these occasions, the supplier (Centrica in this case) has a list of justifications (something about distribution and regulatory costs increasing), but being the cynic I am it’s difficult to see this as anything other than exploitation of a dominant market position.
This was always a big risk with privatisation and it was naïve to imagine that a) energy companies would rein in their profit-maximising instincts and b) the state regulator would be anything other than toothless.
What about “normal” businesses? How should they set prices or handle price increases? Obviously you need to cover costs and make something to take home, there’s a more fundamental issue of which business owners should be aware – value.
We’re all customers and we all demand “value”. But what does “value” actually mean? The mistake most of us make is equating “value” with “price”. They are not the same thing.
Value is the judgment a customer makes about the overall worth of a product or service. Value has two elements for a customer – the price paid, plus, crucially, the benefits received.
Understanding that relationship has huge implications for pricing and, indeed, how you do what you do in your business:
Value = Benefits/Price
I failed O Level maths the first time, but even I can see that value can therefore be increased by increasing benefits or decreasing price.
But, because I then triumphed in my retake with a glorious C, I can also see that price could be increased, so long as benefits are also increased to keep value constant or increasing.
And that is a MASSIVELY important lesson to take on board when thinking about pricing.
Yes, your product or service has to do what it says on the tin – that’s a given. But it’s the other benefits, peripheral to the main product or service, that will truly differentiate you from your competitors and allow you to maximise your price*.
Fortunately, benefits are often very simple, very cheap, very easily implemented service-level type things. But they are things customers want (may not need, however) and for which they may be prepared to pay a relatively premium price (see the equation).
It may sound theoretical or a bit too management consultant-y, but it’s actually a really powerful concept to get hold of and I’ll talk about the practical application of this stuff next time. In fact, the whole thing was perfectly summarised by Bananarama and Fun Boy Three in 1982 – it ain’t what you do it’s the way that you do it.
*not for Centrica and friends though. Their market is dominated (>90%) by six big suppliers (effectively an oligopoly therefore). What one does, the others will also do. Very cosy.
Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.