Is your company big or small? Do you sell b2b or b2c? Are you the market leader or new to the marketplace? Wherever you sit you will all have one thing in common – the need to achieve the best price for your products to maximise both sales and profits.
There are of course many different pricing strategies you can use depending on your own unique pricing objectives – and it is imperative that you have these objectives to the forefront of your mind when arriving at a suitable price for your products. The following tips or tricks will assist you to arrive at your best prices:
1. Know Your Market – and Your Competitors
OK, so your're not a fortune-teller - but you can keep track of outside factors that will impact on the demand for your product, e.g.the economy, weather, changes in legislation etc. Also take into account your competitors and their potential actions.
You will need to know what the competition is charging and whether you should match them for price or try to beat them? Consider any regional differences in price too. If you wish to compete on price, be sure that you can cover all your costs. A price war could be extremely damaging to your bottom line.
You will need to move with the times - costs, customers and competitors change, so shift your prices to keep up with the market.
2. Know Your Customers
Keep an eye on what's going on and talk to your customers regularly to make sure your prices remain optimal. Find out how much your customers/potential customers are willing to pay for your products by using formal and informal market-research. Try segmenting your customers into the price sensitive, the convenience centred and those for whom status makes a difference. Figure out which segment you're targeting and price accordingly.
Regularly listen to your customers and take note of their feedback. Let them know that you care about what they think.
3. Choose The Best Pricing Strategy
Decide which approach is most suitable for your products and the market you are in. The most commonly used strategies are Cost-plus Pricing, Value Pricing and Psychological Pricing. We've discussed the merits of these strategies (and others) in previous blogs. You may have to try different strategies on different occasions – or a mixture of all.
4. Cover All Your Costs
Add all of your direct and indirect costs together and divide by volume to produce a unit breakeven figure. Remember that you need a return on any capital investments and money for future expansion/replacement of fixed asets.
You should also constantly re-evaluate your costs. To sell it right, you have to buy it right. If you are having a problem selling a product at an acceptable profit, it may be that you are not buying at the right price. Your costs could be too high rather than your price is too low.
5. Do Not Under Price
Pricing your products too low can have a disastrous impact on your bottom line, even when times are tough. It might be that you think this is the best tactic to drive up sales volume but more often than not it simply means that you product is perceived as 'cheap'. Remember that consumers want to feel that they are getting their "money's worth" and most are unwilling to purchase from a seller they believe to have less value.
6. Do Not Over Price
Overpricing a product can be just as detrimental since the buyer is always going to be looking at your competitor's pricing. Pricing beyond the customer's willingness to pay can also cause sales to dip. Put yourself in your customer's shoes and think what would be a fair price to you?
7. Understand ALL Your Business Priorities
Apart from maximizing profits, it may be important that you maximize market share with your product, in which case the value of your product increases as more people use it.
You may also want your product to be known for its quality. If so, you may want to price your product higher to reflect this quality. During an economic downturn, you may have other business priorities, such as sheer survival, so you may want to price your products in order to recoup enough to keep you afloat.
8. Monitor Your Pricing
Another key component to pricing your product right is to monitor your prices and your underlying profitability on a monthly basis. Focus on the profitability (or lack of profitability) of EVERY product you sell to make absolutely sure they are all contributing to your goal of making money.
Conclusion
You owe it to yourself and to your business to be relentless in managing your product pricing. Remember, how you set the price of your products could be the difference between the success - or failure - of your business.
Sources
- http://www.inc.com/guides/price-your-products.html
- http://economics.illinoisstate.edu/ntskaggs/readings/maximization.shtml
- http://www.briantracy.com/blog/general/7-principles-to-maximize-your-profits-in-any-market/
- The Strategy and Tacticws of Pricing, Tom Nagle and John Hogan, 2016.
- Pricing with Confidence: 10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton, 2014.
- Pricing Strategy:tactics and strategies for pricing with confidence, Warren D. Hamilton, 2014.
- Pricing for Profit:how to develop a powerful pricing strategy for your business, Peter Hill, 2013.
- Pricing Strategy:how to price a product, Bill McFarlane, 2012.