A good product pricing strategy, one that is easily integrated with your company’s brand identity and overall marketing plan, can provide your small business with a substantive edge in the marketplace. Knowing precisely how, and at what level, to price your products gives you a marked advantage over a competitor who guesses at proper price levels.
Unfortunately, many small business owners or independent contractors struggle continuously with pricing, never feeling relaxed, alternately worrying their prices are set too low or too high. Lack of a clearly delineated pricing strategy can hurt your business in the marketplace. Regardless of whether your product pricing tends toward the high side or the low side, customers are more comfortable with and appreciative of relatively predictable prices. For example, customers of Tim Hortons expect to pay about $2 for a cup of coffee. A little variation in price is fine, but the popular quick service food chain might experience a revolt among its long-term, loyal customers if it suddenly raised the price for a medium coffee to $3.50.
The secret to eliminating stress over product pricing is having a pricing strategy that encompasses and methodically examines all the various factors relevant to setting prices, and is designed to calculate optimal prices for your products.
Basic market research of current marketplace conditions in regard to your products provides a good starting point for your pricing strategy. Elements of marketplace conditions include the general price that potential customers are willing to pay for your company’s type of products, as determined by looking at the range of prices for similar items, and more specifically, what prices your competitors are charging for products that compete directly with your own.
The overall state of the economy, such as a significant inflationary or deflationary trend, should also be factored in to your pricing. Another element to consider is the condition of your industry, which includes competitor pricing. For example, regardless of overall economic conditions, price competition among cellphone carriers has remained intense, putting downward pressure on prices.
When examining and evaluating marketplace conditions and competitor pricing, also consider any advantages your products have over competing products, such as an extra convenience feature that may justify charging a premium over competitors’ products. Doing solid market research should provide you with a fairly clear idea of what pricing levels the marketplace will bear.
Your Cost Price
Since no business can remain viable indefinitely without turning a profit, it is essential to set product prices that generate a profit. The trick to doing this basic task well is being sure to include all of the factors that comprise the cost of producing your product. These are not just basic materials, labor, and production costs but also your total overhead and operating expenses, such as taxes, marketing expenses, delivery costs, and the cost of providing customer service. Approach cost pricing with an eye toward determining your actual product cost per unit, and then add on to that what you perceive as your needed or desired profit per unit that enables your business to profitably grow. This process is commonly referred to as “cost-plus pricing.”
An alternative to cost-plus pricing, one that involves approaching the issue of pricing from a different perspective, is value-based pricing. Value pricing is aimed at figuring the perceived value that your product holds to your customer.
Value pricing is especially appropriate for those who provide professional services or high technology products. For example, consider a freelance business consultant who develops marketing campaigns. When evaluating the cost of producing an advertising campaign, the consultant’s time and operating expenses may not add up to a particularly high dollar amount. However, if the advertising campaign the consultant designs for a client is projected to increase the client’s revenues and profitability by tens of millions of dollars, then the value of the service, regardless of the tangible costs to provide it, should be the determining factor in setting a price.
Value-based pricing is also important because of basic facts of consumer psychology. Consumers generally tend to associate exceptionally low prices with inferior quality, and conversely, to associate higher-priced products with superior quality. Therefore, if with the goal in mind of getting consumers to have a positive impression of your company as offering bargain prices, you price your products too low, it may instead create a general consumer image of your company as producing low-quality products.
Adopting the kind of strategic pricing approach outlined above can reduce much of the stress and anxiety that commonly surrounds product pricing. Making the effort to do proper market research, and then taking the time to examine things such as value-based pricing and extra features that may command premium prices, enables you to better determine optimal product pricing, thus increasing revenues and profits for your small business.