Getting your pricing right pays; it impacts your bottom line, your market, and your overall success. A pricing strategy should consider your costs, customers, and competition. And when you understand these three elements, you can consider which pricing model fits best. So, let’s look at how you can make sure your price is right!
Costs, competition and customers
Most business owners are keenly aware that their selling price needs to be higher than the buying price for their products or services. However, unravelling the true costs is not always straightforward. Calculations should also include less visible costs, such as time spent on following leads, travel, and shipping. This an area where a Business Mentor can offer valuable insight. Their experience means they often know where hidden costs lie.
Another way you can grow your understanding of your costs is with systems and processes that measure well. By breaking down your activity into quantifiable steps, you'll see where you spend time – and money. You can find more ideas on this in Business Mentor’s blog library.
Once you understand the costs you need to recoup, it's time to research. Ultimately, you need to price your products or services in a way that is attractive to your target market. Consider their needs and budget when setting prices.
Good pricing also reflects how you are positioned in the market. It's vital to understand how customers perceive you rather than how you hope they'll see you! Premium positioning allows you to price near the high end; value-based positioning puts you at the other end, where revenue grows by increasing your efficiency and volume of sales.
Check what your competitors are charging for similar products or services. How do their brands, prices and positionings compare to your own? A successful or dominant competitor may help define your place in the pricing landscape.
Top pricing strategies
Tried and tested pricing strategies can give you a strong framework to set your own approach. Here are some of the most enduring pricing strategies.
Cost-plus pricing: This is the most common pricing strategy. You simply add a markup to your costs to determine your selling price. To succeed, this must also take into account your customers and competitors. Understanding your break-even pricing is a good place to start when taking this approach.
Value-based pricing: This strategy considers how your customers perceive the value of your product or service. You target your pricing at the level people are willing to pay, which means you may be able to charge much more for something than what it costs you to deliver. Within value-based pricing, a bundle approach allows you to combine products and services, encouraging your customers to buy more. With these strategies, it's essential to have good insights into customer preferences and your own true costs.
Competitive pricing: This strategy involves setting prices that align with your competition. This can help you attract customers who are price sensitive and is also useful if you're in a field where there are strong expectations about price. The best strategy for you will depend on your specific business and market.
You’re not locked in forever once you’ve found the pricing strategy that fits. Although it can be difficult to change perception about your brand, here are some ways you can keep refining your approach.
Track your results: Make sure you get the most from your pricing with regular and consistent measurement of sales and costs. Be ready to respond with adjustments if you need to.
Get into consumer psychology: Price psychology accounts for mental heuristics, which can help encourage sales. For instance, prices just under a large number, such as $19.95, are often perceived as much cheaper than rounded numbers, such as $20.00. People also attribute more value to items that seem scarce, so 'last chance' positioning can be effective.
Promote and discount: People like to feel they have found a good deal, so discounts can be effective. However, be honest and avoid overdoing it – you don’t want to run afoul of consumer guarantees or trust.
Be flexible: Don't be afraid to adjust your prices. Lowering prices may help you grow sales. In contrast, if you can't keep up with demand, raising your prices can help you deliver better quality and find more rewards in business.
Although there's no one size fits all strategy for pricing, it's worth taking time to get it right for your business. By understanding the different approaches and your customers, you can make informed decisions. Don't be afraid to experiment and adjust your strategies over time to find the perfect fit. And if you'd like an objective sounding board, our experienced Business Mentors are here to help. Good luck, and happy pricing!