Pricing strategy: Setting your price
Determining your pricing strategy is a critically important issue for a business owner. Here are some of the factors that you should consider when determining how much to charge.
Calculate your costs
You’ll do a better job of setting your prices if you know how much the product or service costs you before you start. No matter what your pricing strategy is, at the end of the day the selling price of your product or service should more than cover the associated costs, otherwise you won’t be in business for long.
Your pricing strategy needs to factor in the variable costs of producing each additional unit and the fixed costs that are incurred regardless of the quantity produced.
Develop your marketing strategy
Work out the target market for your product or strategy, and then think about your marketing mix, which is usually defined as the product, price, placement and promotion.
Going through the processes of establishing the needs of your target market, determining your unique selling proposition (USP), and identifying the benefits of your products or services will help you to price your products and services and work out how much budget you’re likely to need for marketing.
"Having a fantastic product or service is one thing, but making the customer aware of its value is another."
Estimate the demand
Demand is driven by tastes, income and the availability of other products at similar or different prices, and can be a major factor in your pricing. For example, if your product or service is more expensive than your competitors’ you may find your sales volume is lower.
Having a fantastic product or service is one thing, but making the customer aware of its value is another, so as mentioned above, having a great marketing strategy is vital.
You also need to consider factors such as seasonal changes to your costs or to customers’ willingness to purchase at different times of year. While you’re thinking about that, it’s worth considering whether your business and cash flow will be able to deal with varying levels of consumer demand.
Understand the competitive environment
Questions to ask yourself about your competitors and the market place you’re operating in include:
- What benefits does your product or service have that competitors don’t?
- Can you estimate your competitors’ cost structure? How does it compare to yours?
- What price points are already in the marketplace for your type of product?
Play around with some alternatives
Once you’ve gathered all your pricing information, review some pricing alternatives by modelling a few different scenarios. (Flying Solo’s rate calculator can be handy here).
Depending on your business you may decide to use different pricing strategies for different products or groups of customers. It’s worthwhile reviewing the implications of each pricing strategy for your profitability, turnover and cash flow.
How do you determine your prices? Please share your comments below.