In a time when consumers are resetting their priorities, values and behaviours and raw material/cost prices have fluctuated wildly, it is more important than ever to constantly review your pricing and the results of any pricing actions.
Each manufacturer and brand faces a unique set of situational factors that are in an ongoing state of flux due to uncertain economic times, which makes pricing so complex. Remember though, that effective pricing is a powerful tool so the payoff is well worth extra effort.
What should you charge for your product? Are you looking to create a low-priced item you can sell as a loss leader to bring in new customers or are you looking to create a high-priced back-end product to sell to your existing customers? Everything can seem hunky-dory when what you are selling commands a premium price. However, in a competitive world where many other businesses seemingly offer products and services similar to yours, how do you command that premium price?
There are several factors you must conside before pricing your products correctly – here are my top 10 tips.
1. Supply and Demand
The greater the demand for your product or service and the more limited the supply, the more you can charge. Perhaps the easiest way to do this is to position yourself as the pre-eminent expert or supplier. Customers will be knocking each other out of the way to buy from you rather than lesser-known competitors.
2. Market Niche
It's not rocket science - the narrower your market niche, the more you can charge.
3. Add Value
Add extras that have high-perceived value but don’t cost you much.
4. ROI
If you design your product or service so it generates a large ROI that's easy to see and measure, it'll be much easier to sell at the price you want to get. For example, £129.00 for a high-tech central heating thermostat may seem like a lot of money, but not if you can prove that by installing the thermostat it will save the buyer £150 a year in heating costs.
5. Customer Satisfaction
You need to address customers’ concern about whether they'll be satisfied with your product. You can control this by offering a money-back guarantee – which can overcome any sales resistance. If you guarantee customers will be happy and you'll refund their money if they're unhappy, they'll be more willing to pay your price, no matter what it is.
The best guarantees are fair, generous, long-term and unconditional. Most people won’t take unfair advantage of your guarantee and if you sell a quality product, accurately described in your marketing, at a price that’s fair in relationship to its value, your return rate should be low.
6. Product Positioning
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Are you pricing for survival? Do you have competitors chasing you, copying you or pricing below you? Is your market saturated with similar products? Is your product in the declining phase of its product life cycle? If survival is your pricing objective, it should only be a short term strategy.
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Are you the market leader, with the largest market share? If so, can you gain economies of scale in the production of your product, or in the distribution of your service? A low price strategy might be a good objective for you to focus on if this is the case.
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Are you the market follower and content to be there? Then follow on price too. If you want to move up and become a market challenger, your pricing strategy will need to reflect that intent.
7. Price Elasticity of Demand
Be aware that price elasticity of demand is closely tied to the amount, direction (up or down), and frequency of price change. If demand changes considerably with price increases/decreases, demand is elastic. If demand does not change much if the price goes up or down (to a point), then demand is inelastic.
Normally, the higher the price, the lower the demand – the exception would be for prestige/luxury type products.
8. Price Sensitivity
Price sensitivity needs to be considered when setting the price for any product and service, and it needs to be particularly considered when you change a price up or down.
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Customers are less sensitive to price increases if your product is very unique/has high status.
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Customers are more sensitive to price increases if they can easily substitute your product for a lower priced alternative.
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Customers are less sensitive to price increases when they have difficulty comparing the qualities of alternative products.
9. Costs
The process of setting your price or building a pricing strategy must also include understanding and knowing your costs.
You will need to estimate (if a new product) or review your historical data (if an existing product) for both fixed and variable costs. For pricing purposes, you will need to know how increasing production capacity can affect your costs per unit. Understand that costs always need to be covered in setting a price, unless you are using a pricing strategy for specific reasons (e.g. loss leader pricing).
10. Competitive Pricing Strategies
Most businesses can, and need to, use different approaches and strategies for different and varied markets, products and services, and as a reaction to competitive activity. Review your strategy on a regular basis to remain "in tune" with market conditions.
You can differentiate yourself by analysing and applying a pricing strategy that is created specifically for the environment you operate in. This is always easier to do if you are in the introductory phase of the product life-cycle and/or if you are the market leader. If these situations do not apply then create enough of a difference between you and the competition - and make sure that your customers and the market understand and accept your unique differences and advantages.
Businesses need to be more aware of the power of competitive and comparative markets than ever before because technology and the internet makes pricing information available 24 hours a day, 7 days a week. The speed of pricing changes makes this an urgent action item for all businesses.
Conclusion
A well-planned pricing increase or decrease will affect your current revenue and profit. Try different scenarios to see which pricing changes can help your business grow. Test different options to see what works best for the way you do business. Your pricing strategy should involve constant refinement – what works today might not make sense next year. If you follow the tips described above you should be able to keep ahead of your competitors on pricing.
Sources
- https://www.entrepreneur.com/article/252962
- https://www.helpscout.net/blog/pricing-strategies/
- http://www.nielsen.com/content/dam/corporate/us/en/newswire/uploads/2009/07/six-keys-to_price-planning_whitepaper.pdf
- http://www.more-for-small-business.com/pricing-strategy.html
- http://smallbusiness.chron.com/pricing-strategies-companies-2730.html
- http://connectwise-mktg.s3.amazonaws.com/ebooks/pricing_5tips_Maximizing_Profit_eBook.pdf
- Pricing Strategy:how to price a product, Bill McFarlane 2012
- Pricing for Profit:how to develop a powerful pricing strategy for your business, Peter Hill 2011
- The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016
- Pricing Strategy:tactics and strategies for pricing with confidence, Warren D. Hamilton 2014