The price you offer your product or service is one of your most critical business decisions. At best, setting a price that is too high or too low will prevent your business from growing. In the worst-case scenario, it might hurt cash flow and sales.
You should think carefully about your pricing plan before starting a business. The profitability of established firms can be raised by regularly evaluating prices.
You must be sure that your prices and sales levels will enable your company to be profitable before setting your prices. Consider how your product or service compares to the competitors.
The strategies that follow show you how to optimize your profits.
1. Paying for both fixed and variable costs
For a business to profit, all of its expenses must be paid. Accurate cost calculation is a crucial step in developing your pricing strategy.
Separate your expenses into two categories:
Fixed costs such as rent, wages, and corporate rates are always there.
Variable costs, such as rawer materials, additional labour, and transportation, climb as your sales do.
When you set one, your price must be higher than the variable cost of providing your good or service. Then, each sale will go a long way toward helping you cover your fixed expenses and turn a profit.
A car dealership, for instance, has annual fixed expenses of $400,000 and variable costs of $18,000 per car sold. If the company sells 80 vehicles annually, it must contribute at least $5,000 towards the fixed costs ($400,000 divided by 80) to break even.
2. Cost-plus versus value-based pricing
Cost-plus and value-based pricing are the two fundamental approaches to setting prices for your goods and services. The ideal option will rely on the nature of your industry, how your clients are influenced to make purchases, and your competition.
Cost-plus pricing
This adds the amount you require to earn a profit to the cost of producing your good or service. Typically, a percentage of the price is used to express this.
It is typically better suited to companies that deal in high numbers or operate in marketplaces where price competition is prevalent.
Cost-plus pricing, however, disregards your brand and market position. Your actual profit per transaction is frequently lower than expected since hidden costs are simple to overlook.
Value-based pricing
This concentrates on the price you think clients will pay depending on the advantages your company provides them.
Value-based pricing is based on the quality of the advantages you can demonstrate you provide to clients.
You can price following the value you provide clients if you have clearly defined advantages over your rivals. Although this strategy can be highly profitable, it can also alienate potential customers only interested in price and attract new competitors.
3 Research your rivals
Your pricing should make sense to your customers based on the calibre of your items, the degree to which they are unique, the nature of your firm, and what consumers have learned to expect from businesses with comparable products.
Your items might be worth more than your rivals depending on your unique selling proposition, which distinguishes your company from other companies. In any case, it’s a good idea to research to determine the suitable pricing range for your products.
Track the prices of other companies who sell comparable products or serve the same market (handmade home goods, for instance). Watch to see whether they change their prices or stay the same. If any product reviews are available for these products, pay attention to how buyers describe the item’s worth and cost.
Use those prices as a guide when determining your products’ pricing and consider your unique selling offer.
4 Examine your sales data and make necessary adjustments.
Once your online store has been launched, monitoring sales will allow you to determine whether you have priced your products correctly.
Are your goods disappearing quickly? Or does the stock seem to be stagnant? You may have the opportunity to change your pricing, whether your sales are extremely high or low, for the entire company or just one product. You might have priced your products too low if they are flying off the shelves. Your pricing might be too high if they aren’t moving at all.
Try adjusting the cost of your products in modest increments, either up or down. Find the right price for your company: This indicates that your sales are consistent and you can maintain your output level.
If you lower your prices, remember you still need a healthy profit margin. Instead of feeling trapped at the lowest price point you can offer, give yourself some free space when setting your first pricing so that you can increase or decrease it based on sales patterns.
Sales can also vary depending on factors other than the product or its cost. If you sell beach umbrellas, you might have noticed that they sell the best in the summer. Be prepared to adjust your pricing (and marketing) plan to account for seasonality and other factors.
A lack of materials or a decline in the economy are two external factors that can affect the cost of items supplied. Ensure that your pricing plan is flexible enough to adapt to changes in your market and the global economy.
5. How to develop a pricing strategy
It would help if you choose between value-based pricing and cost-plus pricing.
It’s critical to research the services and prices offered by your rivals. You can use this information as a starting point when you call your competitors and request a quote.
Setting your rates too high or cheap without a clear cause is not a good idea. Pricing too low will only result in the loss of earnings. The price you offer your product or service is one of your most critical business decisions.
It’s also crucial to consider how people perceive your good or service. A high price helps your product’s perceived value to be seen as premium in various regions. This could entice clients to buy from you or turn away budget-conscious clients.
Charge different pricing to different consumers to reward them for their loyalty, such as when they make multiple purchases or purchase additional or related products. Remember that unless you charge them more, consumers who are expensive to satisfy will result in lower profits. You might spend more on one-time sales than on repeat customers.
In conclusion
Business owners can raise their sales by successfully pricing their products by combining various techniques and tactics.
To ensure you’re getting the most out of your products, keep in mind that pricing is a continuous process that you should continuously analyse and change as necessary.
