Undercutting the competition isn’t always the best way to price your products. It’s really important your business puts a little more thought into its pricing strategies.
Learning to how to price a product or service correctly is vital if you’re going to maximise your company’s profitability. And as well as directly influencing your bottom line, your pricing strategies play a key role in how people perceive your business.
You can pick from lots of different pricing strategies when choosing how to price a product or service.
Cost-plus pricing means working out how much it costs you to sell each item, then adding a mark-up. You can work out your mark-up in many different ways, but a common option is to take the average of your variable costs, add this to your fixed costs and then tack on the profit you want.
For example: You run a children’s shoe shop selling shoes which cost £15 a pair to buy wholesale (that’s your fixed cost), plus £5 in staff time, marketing and so on to sell (that’s your variable cost). If you want a profit margin of 50%, you’d sell the shoes for £30.
A cost-plus pricing strategy is easy to put into practice. You know all your costs are covered and you know you’ll be profitable. It’s good for companies that sell fast-moving commodities. However, it doesn’t let you consider demand – which can hugely affect how much people will pay for something.
Creating a budget can help your business in several ways:
Competition-based pricing involves looking at what your competitors charge, then using those figures to decide how to price your products or services. You might decide to sell at similar prices. You might charge more if you think your product merits it. Or you might charge less if you want to aggressively win business from other companies.
Example: You run a jam company and you’re introducing a new type of banana-flavoured jam (yes, really). Your know a small jar of jam usually sells for around £3, but as you want to go in aggressively to grab market share, you settle on a price of £2.
A competition-based pricing strategy makes you think about your position in the market and how you differentiate yourself from other companies. It also keeps you competitive. However, you need to be wary of overlooking how much your product actually costs to make (you need it to still be profitable) and you risk getting into a pricing war.
Customer-based pricing means you have to get some idea of how much your customers are happy to spend on your product or service. First of all, find out how customers feel about your products. Are they willing to pay more because they feel you offer higher quality? You might decide on a pricing strategy to appeal to luxury shoppers or bargain hunters – or you might settle between the two.
Example: You’re running a dog food company that positions its products as top-quality, organic alternatives to mass-market tins of tripe – with prices to match. To make this pricing strategy work, you’re also running a targeted marketing campaign aimed at people who buy expensive things for their dogs.
Customer-based pricing is flexible, giving you the chance to target certain groups and set prices consistent with your brand image. But you don’t want to focus too much on what your customers think, because then you’ll end up ignoring your competitors’ pricing strategies or forget to build in production costs. Doing the research to actually find out what your customers think can be expensive too.
Combination pricing strategies
In practice, many businesses combine elements of several different pricing strategies to cover all their bases.
And however you decide how to price your products, it’s important you keep evolving and experimenting. Your pricing strategy isn’t fixed, and you can adapt how you charge for things depending on what the market is doing.
Keep comprehensive records using your accounting software to track how effective your pricing strategy is. Over time you’ll build up a useful picture enabling you to identify areas to increase margins or where your prices aren’t competitive enough.