Do you use the supply and demand principle in your business' pricing strategy? You may think not, but I'll bet you have at some point, even if subconsciously….
Pricing is one of the most important strategies of a business. It's the one that ultimately dictates whether your business will earn you enough to be able to actually make a living from it.
But it's also one of the hardest strategies to figure out. Which is perhaps the reason that many people don't actually have a pricing “strategy” … they simply start out with “a price” and gradually play with it as they progress in their business….
They adapt their prices, up and down, to try and work out a level that “works” … where their “demand” stays strong, but also where they are earning enough to make it worthwhile.
Which is, essentially, playing with the supply and demand curve….
The basic principle of supply and demand is simple: the price of any “product” within a market is inherently linked to both its level of supply, and its level of demand. The highest prices will always be for things in high-demand that have limited supply … the lowest prices for those with low demand and an abundant supply. And as demand and/or supply changes, the price will move up and down that curve accordingly.
It's a basic economic principle that makes perfect sense. Yet it's not just a principle that happens around a product, with pricing being dictated by natural changes to supply and demand….
It's a principle that is also used to manipulate supply and demand … because by looking at this curve we can also see that a lower price leads to a higher demand, AND that a higher demand leads to a higher price … and looking at it from that angle means we're able to use this information to our advantage.
So how can you use this knowledge for YOUR pricing strategy?
Well, the above tells us there are two ways of exploiting supply and demand in business.
One of them is the more common, BUT – for service-based businesses in particular, it actually tends to lead to ongoing pricing challenges for your business.
Whereas the other will allow you to develop a pricing strategy that works for you … rather than for your customers.
The traditional supply and demand model, and its problems…
The more common approach is based on the first of those “angles” mentioned above – a lower price leads to higher demand.
Essentially, the principle that demand is led by price:
Price goes down, more people will buy – because it's cheaper and more people can afford it. So the assumption of this first approach is that dropping the price will cause the demand to go up. If you’ve ever offered a discount for your services, you’ve made this assumption.
Conversely, the assumption continues: when price goes up, fewer people will buy. Or perhaps more accurately, fewer people are prepared to pay that price in exchange for the value they perceive it gives them? Either way, increasing the price will lead to demand going down.
So you're attempting to alter(or manipulate) the demand by changing the price; it's price-led demand.
This is the better-known supply and demand model, largely because it is so present in our lives … January sales, after all, are based entirely on this concept.
Which leads to the decision making that looks something like this:
Need more clients? Just drop your prices, or put out a special offer – tempt people with a “don’t miss this price” offer, and your demand should pick right up….
Or maybe you want to decrease demand? If business is booming and you're getting more enquiries than you can handle, or more work than you have time for … put your prices up, slow down that demand, and you'll be left with a smaller pool of clients – but those willing to pay more.
If you're in that second category, GREAT. You have the demand and you've already recognised you can put your prices up. You're looking good.
But if you're in the first category, utilising this principle of the supply and demand curve is likely to cause you a few problems … particularly if you're a service-based business.
The problem with the price-led demand model
If you're a service-based business, your “product” is commonly linked to your time.
So increasing your demand by dropping your price means you may increase your overall income … but you'll be doing it at the sacrifice of your time.
You have to work longer, to earn the same amount. You may even find yourself having to work late into the night to fulfil all that demand you created, yet you don't have nearly enough money to show for your efforts at the end of it.
So you're successfully creating demand, but it's not sustainable … there are a finite number of hours in the day, and working all of them to earn the bare minimum isn't why you decided to become self-employed….
But there's another problem. A bargain price may work well with tangible products: a pair of shoes, a laptop, a washing machine, etc … because those buying it know there is no difference in the quality or the functionality than when it was at full price. So they know they're getting a bargain. This is why the price-led demand model works so well in retail, and the reason this version of supply and demand in business is so well-known.
But in service businesses, a “don’t miss it at this price” offer can be great for your client but painful to you.
If someone wants a VA they can trust with the intricacies of their business, or an accountant they can trust to accurately handle their tax affairs … a web developer who will create a quality, well-functioning, on-brand website for their business… are they going to be looking for the lowest price?
Or could a low price or a “special offer” be sending a wrong message? If the price is too low, the quality and reliability of your work may be questioned … so you may actually be reducing the demand from the very clients you want most – those who are happy to pay more, to ensure the good quality.
So – whilst price-led demand can be a successful and useful strategy in business, it isn't actually the ideal supply and demand model for a service-based business.
Which leads me to the alternative model.
The demand-led pricing model…
This follows exactly the same principles as traditional supply and demand in business, but it's based around that second “angle” – that a higher demand leads to a higher price.
It's focused on the demand, first.
So your pricing is adjusted based on the intensity of demand, rather than adjusting your pricing to drive the quantity of demand.
When demand is intense (“must have it”), your offer will command a higher price. With intense demand, there are “quality” potential customers – those who value the need over the price.
The sweet spot? - An intense demand with a limited supply! When you’re “the only available option”, for something the client intensely wants, you have the makings of a business to give you a lifestyle those who compete on price will envy.
So, tapping into intense demand is key … but how easy is it to influence that?
In a service-based business scenario, judging your demand essentially comes down to: “How badly do people want what I can offer” (demand), “How many other people offer it” (supply), and “How easy is it for people to get elsewhere” (supply)….
The good news about this model is that the first question means you're focusing on what you offer – it's all about what you do, which is 100% in your control.
The problem with this model is that those other two questions can lead us to focus on our competition … and if you're too focused on your competition, you may think you have to adjust your pricing to offset the “high levels of supply”… which can lead you back into that position – as with the price-led demand – where you're working long hours, for little reward.
However, in contrast to the price-led demand curve, THIS version CAN still work for you.
Using the demand-led supply and demand model to your advantage
As you’ve seen, more competition leads to lower pricing. It can be easy to look at other businesses “similar to you”, and see them as competition.
…particularly if you're suffering from any sense of doubt, lack of confidence or imposter syndrome.
And if that is the case, it can be a natural instinct to keep your prices low in order to compete in that busy market.
But here's the thing: They may look similar to you … but your offer may be meaningfully different. It’s the difference of your offer which creates the high value your clients intensely demand.
The “trick” – if we can call it that – is to focus on big enough problems that clients care about … and offer solutions that are different enough that you’re the only viable option to solve them.
So six-million-dollar question to ask is “what are my clients deeply fed up with, and what different solution can I offer them?”
The more you focus on this, the more likely you are to create a solution that people CAN'T get as easily elsewhere … so you're naturally reducing the supply simply by creating something different.
And how do you create something people badly want? You focus on your value.
Demand is, ultimately, led by value.
Discounted products sell because people think the very fact that it is cheaper than normal means they are getting good “value for money”. But that's not to say those discounted products are always cheap, they are simply cheapER … so it's important to remember that value for money doesn't need to mean cheap, or even “reduced”. It just needs to mean a good perceived VALUE for the price they are paying.
So, you can ensure a demand for your service simply by focusing on the VALUE you can offer your clients.…
Focus on the solutions you offer. The problems you can solve. The time and money you can save your clients. The benefits your service can bring them.
Focus on WHAT you your clients WANT and you’ll naturally drive demand for your “product”; your service … based on what how it helps satisfy their intense demand.
Which means you can charge what you need to. Because you’ve stepped away from the compete-on-price game.
You've focused on ensuring a brilliant, different offer, and are generating demand from that … rather than generating demand from your prices.
However you want to look at it, the key is to create the intensity of demand … which means you're in control of the pricing.