How To Work Out Your Pricing Strategy

Congratulations! You’ve got a new line of products or an amazing service to sell. It’s an exciting time and you just know you’ve got a winner on your hands. What you’re unsure of is how to price your product. Do you price low in order to generate more sales? Perhaps you price high and create an appeal in the quality and exclusivity of your product. Your pricing strategy needs to cover your costs, align with your target market, compete in your market, balance with your unique selling point, leave room for special offers and create profits.

COVER YOUR COSTS

Before settling on a price, make sure you know what price will cover your costs.

Don’t forget costs such as:

Direct Costs:

• Supplies and materials
• Your time involved in providing the service or creating the product
• Staffing costs (Link to employee benefits article)
• Shipping
• Insurance

Indirect Costs:

• Overheads
• Marketing

Of course factoring in all the costs isn’t always easy. It’s worth having a chat with your accountant to ensure you have the correct formulas and understand the appropriate variables for your business.

There is no point in having a pricing strategy that doesn’t cover all your costs. To calculate this effectively you need to know how much you can realistically sell and how much you need to sell in order to cover your non-variable costs.

ALIGN WITH YOUR TARGET MARKET

Your pricing strategy is a part of the overall image that your business projects to the world. This means that it needs to fit in with the image of what your consumers will be willing to pay. You can’t have a high price if your target market is low-income families. Conversely, if your target market is high-income business professionals then a low price may give the impression that you can’t provide the quality they are looking for. To work out the sweet spot for your product you may have to do a bit of research to understand how the different prices are viewed by the market.

COMPETE IN YOUR MARKET

This is similar to the previous point, except with a focus on how you fit in compared to similar businesses. It’s no good making a decision on pricing if it’s not going to fit within the market in which you are competing.

This doesn’t mean there is no room for differences. The point of difference offered by your business may enable you to have a different pricing strategy than your competitors.

However, it can really depend on what you are selling. If your purple knit sweater is priced at $250 while everyone else is selling a similar purple knit sweater for $50, most people will go for the cheaper option. If there is a genuine difference that explains the price gap then your marketing strategy will need to focus on this. For example, perhaps the $50 sweaters are all factory made with synthetic dyed wool while yours are uniquely handmade, with real purple sheep’s wool, to fit the consumer.

BALANCE WITH YOUR UNIQUE SELLING POINT

Your unique selling point is the value that your business focuses on. It distinguishes your business from comparable other businesses. Your pricing strategy must align with your unique selling point as part of your overall strategy.

Some businesses have “affordability” or “budget-friendly” or “lowest price” as part of their unique selling price. If this is the way your business is going then make sure your pricing really is affordable and beats the competition. If your unique selling point is more about the exceptional customer service that you offer, handmade products, exclusivity, or high quality then your price needs to reflect this value.

ECONOMIES OF SCALE AND SMALL SCALE OPTIONS

Economies of scale basically mean that the more you sell, the cheaper it is for you to sell it. This means that larger scale operations have an advantage in pricing as their overheads are covered by the sheer quantity of their sales, rather than by every individual sale having a massive impact on their bottom line.

Small scale options can, however, provide an opportunity for cheaper offerings in order to compete with large corporations. Take for example working from home individual selling consulting services. To make it worth their while they really need to be charging at least twice what they would be getting paid under an employment arrangement. This is because wages should be covering not just raw wages, but also super, leave time, insurance, costs of the job, and other amenities and overheads. However, as someone who works from home, they may only be working to supplement their family income. This means they can afford to sell at rates that are lower than or equivalent to employee wages, giving other small businesses a cheaper option and improving their chances of securing work.

LEAVE ROOM FOR SPECIAL OFFERS

Every marketer knows that creating a sense of urgency, giving customers the feeling that they’re getting a great deal, or being able to offer rewards through cheaper opportunities, can be a great way to drum up some quick business. If your prices are so tight that you’d make a loss by offering specials or discounts, then you’re limiting your options. Although loss leaders (products sold so cheaply you are making a loss on them) can be a drawcard, they only work if you are more than making up for the loss by the profits generated on other sales. Ensure your pricing strategy factors in enough of a profit margin that you can play around with special offers without sending yourself under.

PROFIT CREATION

Ultimately the idea of selling products or services is, of course, to make a profit. Your profit margin needs to be high enough that it’s not just covering your own efforts in the business but is rewarding your risk as the business owner. If your pricing strategy fails to ensure you are making a profit, then it’s not a good pricing strategy.