When introducing a new product or collection to your range, the first question is always, ‘What price can I sell it for?’ In many ways, this is the $64,000 question – or $6,400, or $640, depending on the product.
Getting it right can generate healthy profits for a business, while getting it wrong can see that same profitable product languish on the shelves, gathering dust and tying up staff time and financial resources in the process.
So, how do you know how much an item should be sold for?
Setting the starting price involves considering a number of variables:
• Cost – The first variable, and the one that the majority of retailers rely on most heavily, is the cost of the item when it is purchased from the supplier.
This is a key factor as it will ultimately determine the profit that can be made.
Yet there’s an important consideration that many retailers ignore, and that is the pricing strategy of the supplier.
In most cases, the supplier is never questioned as to how they reached their price and, like everyone, the person who set that price is as susceptible to the same biases, emotions, and assumptions as anyone when reaching the wholesale price.
If you want to rely entirely on someone else to price your products, it helps to know from where they’ve drawn their conclusions.
• Profit – In conjunction with cost is profit. As mentioned previously, pricing must reflect the margin you hope to make on the product.
But more importantly, it should also be compared with the opportunity cost of investing your money into an alternative product.
If you only have so much to spend, you need to consider if this product will provide you with the best return on your investment.
• Market position – Are you a premium business? What target market are you seeking to sell your products to?
For many customers, the cheapest price is not the deciding factor in whether or not they purchase. In fact, for some, the more they pay the better they feel!
That is because pricing is part of what determines a product’s perceived value – a factor that is especially important in luxury categories, such as jewellery.
On the other hand, there are customers who only make purchases based on price. They are usually fickle and will wait for sales before they purchase – making them low-value targets for businesses.
• Competitors – Are your competitors selling the same product? If so, what pricing do they have? It’s easy to assume retailers should always price-match, but this may depend on the market.
Recently, I went for a walk around a rural area where three separate properties were selling horse manure from their front gate – one was selling $1 per bag, another for $2.50, and the last for $3.
Despite the fact they were all within a few hundred metres of each other, when I went on the same walk a day later, I noticed that they all appeared to have a similar number of bags sold.
Clearly, price wasn’t the only factor affecting the buying decision – and the last property made $2 more per bag of manure than the first!
• Added value – The product is not the only thing you’re providing.
What do you offer that makes for a stronger value proposition?
An extended warranty, the promise of free servicing or batteries, cleaning, gift-with- purchase, gift-wrapping, delivery – all of these, among other factors, can justify a premium price.
Online sellers who offer a product along with education on how to use it best, are a great example of this.
• Your mindset – In my experience, the biggest barrier to business owners setting the correct price is their own mindset. In many cases, items are set lower than they could be because of assumptions and expectations the owner held.
The business owner put up barriers that aren’t necessary. Often the most successful pricing strategies are the ones set by other people who don’t have an emotional ‘buy-in’ to the decision.
• Opinion of staff – One of the most effective ways of pricing is to ask someone who has no knowledge of the cost of the item to tell you what they think it is worth.
Again, this has often led to higher pricing policies than a ‘cost-plus’ mentality, especially where the staff are involved and don’t know the inputs. At the end of the day, they are the ones who will be selling it!
Pricing is crucial to making your business work and keeping up the all-important cashflow. Review your current strategy and use the steps above to assess whether you could be selling yourself short.
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