Setting the correct pricing strategy for products and services is a great challenge. Pricing has a tremendous impact on profits because pricing not only determines the quantity sold but also the direct contribution to the bottom line. The following are a few key points to consider when setting prices:
Set a pricing strategy
Start by setting pricing and profit-margin goals. What is your target profit margin given your expenses? Determine if you are competing on price or quality. You cannot do both because quality suffers when prices are lowered.
If you are determined to be a low-cost leader then efficiency in operations is critical; there’s no room to be wasting money on anything. On the other hand, if you are selling quality then do not compromise on price. Discounts are a good strategy if you are a low-cost leader but not when quality is your unique selling proposition (USP).
Pricing correctly should not be based on intuition. Use smart analytical tools to set proper prices. Put in place a specific pricing strategy based on the perceived value of an item to your target market. Do not make assumptions and be prepared to research and test alternatives.
Maximise profits
Any pricing structure should maximise profits. The price should be set so that profits are maximised based on the given demand relative to price. It is not uncommon for prices to be too low. This might bring an increase in demand but ultimately results in lower profits.
Setting prices too high will see decline in sales as buyers choose to shop elsewhere. The key is to price correctly so the number of units sold is maximised and therefore so are profits. Does your pricing structure maximise or impede your sales revenue? Find the happy medium and maximise profits.
Do pricing homework
Review your expense budget and price your products and services accordingly. In determining a budget, keep in mind fixed and variable expenses.
Review marketing expenses and how those are built into the pricing structure and marketing plan of a business – advertising, sales commissions, direct mail and other promotional activities are expensive and should directly impact any pricing strategy.
Review competitors’ pricing and attempt to determine their profit margin. Many businesses have very thin profit margins and others rely on debt. Have a clear plan for using debt wisely or, if fortunate enough, do not incur any debt at all.
Gain a competitive edge
Make pricing a competitive advantage by providing more value than competitors at comparative price levels. Research the competition and add value in a unique way that better meets the needs of the target market. Try to do this without increasing expenses too much and support it with service that is better than your competition. When an offering is attractive to the target market, price becomes less of a factor in purchasing decisions.
Customers are looking for fair pricing; people generally know that realise that they get what they pay for.
The most important need of the consumer is that they make a purchase believing they received a fair price for the value of the product or service. Price is equal to relative value in the minds of customers.
Prices driven down
Competition, excessive inventories and the internet are driving prices lower than ever before. Keep in mind when setting a pricing strategy that we are all forced to do more with less these days.
We have to compete smarter, focusing on customer service and knowledge-based services. In these areas, our expertise and our customers’ returns on investment will determine a fair price.
For those in sales, also remember that you must believe 100 per cent in the pricing of a product or service. Any doubt in this area will lead to customer objections on price and an inevitable loss of the sale.
Customers sense a lack of confidence and competition keeps pricing fair. Have confidence in your pricing strategy and communicate that same assurance with your customers. Price should equal the value you bring customers.
Follow these guidelines and you can set prices that appeal to customers while also aiding the business. This can only lead to more sales and improved profits, which is the reason we’re doing this in the first place, right?