Pricing your products or services is one of the hardest decisions you will make as an entrepreneur. Setting your prices is as much as an art as it is science, with loads of psychology thrown in. You need to balance data with judgement gleaned from customer feedback and the marketplace to inform your pricing decisions.
The best pricing strategy is dependent on the type of business and products or services being sold. Here are some tips that you could use in determining the prices of your products:
It’s all about value
Always remember that you are offering a value proposition to prospective buyers: in exchange for a certain amount of money, your customers will receive something of equal (or nearly equal) value. Pricing is not about the cost of manufacturing the product; rather, it is all about perceived value. The key to pricing is finding the value the product/service provides. Read the article Value-Based Pricing Strategy for Your Business.
Customers want solutions
Customers want solutions, not products. In fact, the product is NEVER the product — the solution is the product. One of the traditional approaches of selling is to align a solution with your customers’ needs and demonstrate why it is better than the competition’s. However, if your customers have deep understanding of their problems and know what they want to solve their problems, it is time to rethink the sales strategy and get ahead of the game by pursuing customers that have an emerging need.
Leverage the balance between pricing and profitability
It is important to understand how your prices affect the profitability of your business. You need to know the costs – both direct and indirect expenses – involved in creating and selling the product, and the markup you need to ensure profits. Determine your minimum margin required to cover all costs before determining price. This may require forecasting your sales volume and give you the target you need to be successful.
Educate yourself about financial management so you can understand financial numbers and what it means for the profitability of your business. Know your breakeven point, and how much you need to sell each month to achieve break-even, at least. Also understand that the biggest cost of selling any product is the labor required to sell it. Read the article Five Routes to Greater Profitability .
Never underestimate the value of branding
Your branding spells a huge difference in your pricing. Brands give us a guarantee of the value in terms of perceived quality. In fact, the logo and reputation of the company command a far higher price than the product itself. The study “The impact of brand credibility on consumer price sensitivity” found that brand credibility decreases price sensitivity. Consumers tend to be more influenced by price on products from lesser known brands.
Tread carefully on volume pricing
Volume pricing is when you are willing to take a lower per-unit price in order to move more quantity. You lower the price in exchange for higher volume. However, be careful on how you use volume pricing for your small business. There is the risk of profit loss with volume selling, and it is important that you do not confuse revenue for profit. Plus, the lower price point will be the new standard for the customer and you may find it hard to sell the product at the higher price for that customer (especially if the customer stops to buy in huge volumes). Read the article Does Sales Volume Make Up for Discounting the Price?
Understand the value of repeat customers
Repeat customers are essential to the success of any business. Remember that the sale doesn’t end when you cash the check – you want that customer to come back (and come back again and again) to your business. On how to nurture repeat customers, read the article the 12 Secrets to Getting Repeat Customers.
Perception of quality
The study “The Effect of Brand and Price Information on Subjective Product Evaluations” found that price positively influences the perception of quality, and inversely influences the perception of value and willingness to buy. No matter how good your product is, if you price it too low, people will think it is junk.
Quality of the salesman
Never underestimate the value of a good salesman. A good salesman understands what the buyer wants, knows how to personalize their interactions and uses psychology to engage the buyer – all of which are qualities that can help push price as a lesser factor in getting the customer to buy.
Similarity and pricing
If two similar items are priced the same, consumers are often less likely to buy one than if their prices are even slightly different. Studies have shown that consumers are inclined to defer their decision to buy when similar items have the same price. Avoid giving the same price to your products, and differentiate them in prices albeit ever so slightly.
Consider the strategy of anchoring
Anchoring is the tendency to rely too heavily on the first piece of information offered (“the anchor”) when making decisions. In a real estate pricing study conducted by the University of Arizona, they found evidence that placing premium products and services near standard options may help create a clearer sense of value for potential customers, who will view the less expensive options as a bargain in comparison.
Understand the dangers of pricing too low
One of the common strategies used by small businesses, especially those new to the market, is to set their prices low. Low price strategy is often used to get business away from competitors and get noticed by customers. However, there are a number of inherent risks to setting your prices too low.
For one, even if you have a high quality or even a superior product, pricing it too low gives the perception that you are offering junk. Customers are likely to ask, “Why is it so cheap?” and immediately think that something must be lacking in the product or something is wrong with it.
Setting your prices too low also makes it much more difficult to increase it later. Since customers have already pegged your products at your low price, there will be resistance, if not backlash, if you start increasing your prices. It’s a lot easier to start with a high price and then lower it than it is to raise a low price to a higher one
Dealing with competitors
One strategy in setting prices is competitive-based pricing, which involves looking at the prices set by competitors and adopting those numbers plus or minus a few percentage points. It is one of the easy ways to set the prices of your products.
Note, however, that there are disadvantages to using competitive pricing. If the competition has a much better product, change the playing field, not the price. Don’t be lead around by the nose by what the competition is doing. You can’t ignore them but don’t follow them either. The way to win in any wholesale or highly competitive market is to offer a service or experience that is unmatched by your competitors.
Data can play a huge role in setting prices. Monitoring the prices of your competitors can help you make decisions whether you need to make adjustment to your prices. However, don’t be ruled by competitor data because there are many variables that dictate the right price for your own products. While looking at your competitors’ data as a point of comparison, be sure to take in consideration the overall goals and state of your business as well as the true value of your products or services.
Consider selling base products with accessories
When pricing your products, look at your entire product inventory. Are you competing in a highly competitive and saturated market (e.g. electronics) where profit margins can be extremely tight? If so, there may be accessories or service plans that you can add or sell with your main product.
You can create package deals bundling your main product with these accessories. For example, you can sell the product for a much lower price if you require a service contract when the product is purchased. You can also upsell your accessories when customers buy your main products. Products with lots of low cost accessories make for great profit margins.
Fill in the price gap
Pricing can be used as a way to create new products. Research the various price points offered by competitors for a particular product, and create a product based suitable for a price point untouched by competitors. Filling a price gap (difference in price between your product and competition) is an effective strategy for differentiating your products in the marketplace.
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