Pricing your products and services is an important part of your business.
If you set your prices too high your products or services may seem too expensive to your customers. If you set them too low, your profits may suffer.
Here are the considerations to put in place when setting your pricing:
Research
Make sure to do your research to set a competitive price for your products. The best price is one your customers are willing to pay that also provides your business with sufficient profit.
There are a variety of pricing strategies. But doing your research is essential to all of them.
Researching isn’t something you only do at the start of your business. It’s essential to continue researching prices regularly to make sure that your business stays competitive and that you’re meeting the expectations of your customers.
Market Testing
One of the simplest ways to understand what your customers will pay is to perform market testing.
Market Testing includes:
- The demand for your particular product or service
- The quality people generally like to purchase
- Purchasing behaviours such as seasonality
- Additional features they desire
- What customers are paying for similar products or services.
Competitors
First, you need to determine who your direct competitors are.
Then by doing sufficient market research you can create a price comparison that compares your price to that of the other available options on the market.
If you use your competitors’ prices as a guide make sure that they don’t have too much influence on your pricing so you don’t undervalue what your business provides and diminish profits.
Calculate Your Costs
Before you calculate your price you need to calculate how much it costs to produce your product or provide your service.
You also need to consider any overhead costs such as tools as well as taxes and GST.
Be sure to include all of the following:
- Cost of materials
- Cost of manufacturing
- Cost of staff
- Cost of marketing
- Cost of taxes
- Cost of other services in your business (accountant, etc.)
Determine Pricing Objectives
What your objectives are in pricing your product or services is important to consider and can determine your pricing strategy.
Objectives can be things like:
- Undercutting competitors
- Positioning your product or service in the market
- Cash flow needs
- Competitors positioning
Positioning
Positioning is the process of establishing the identity or image of your brand in the marketplace so that your customers perceive your products and services in a certain way.
Price can be a key indicator of the position of your product.
Many people assume when a price is higher, that means the qualify of your product is also higher.
However, positioning your products and services as a bargain can also have its advantages.
To establish the positioning of your product pay attention to external factors which can impact your position in the market place.
These include:
- Level of demand: How much demand there is for your product or service will determine the price. For example, you’d find it difficult to charge a premium for a CD player in today’s market place of digital music.
- Level of competition: How many other people are in your market and what are their prices? The less competition there is the more you can generally charge.
- Price sensitivity: Fluctuations in demand by customers. Some industries are more sensitive to price increases than others and a few cents can make all the difference.
- Government regulation: This includes things like taxes, fees, or levies that may increase the price of your product or service.
Anticipating Competition Strategy
It’s difficult to be competitive in the marketplace if your price exceeds that of your competitors by a large margin without a reason behind that.
It’s important to anticipate what your competition is doing with their own pricing strategy and how they will respond to your pricing strategy and factor that into your decision-making process.
Increase Demand
You can use price to increase the demand of your product and service.
This can be done by setting your pricing as more competitive than your competition. It can also be accomplished by bundling or packaging multiple products and services together for your clients to either try something new or get a better deal.
Be mindful of how your products and services complement each other in this process.
Discounts
Although discounts can massively increase sales they can also drive down your profits because there is less profit margin on a discounted product or service.
Before offering discounts understand how offering them can impact your business.
Benefits include:
- Attracting new customers
- Making quick sales
- Inviting return purchasing
- Selling overstock
Different types of discounts include:
- Value-add offers
- Seasonal discounts
- Special offers
- Bundles or packages
- Quantity discounts