Determining the right price for products or services can be one of the most difficult tasks for any business owners. If prices are too low, you kill your chances of profit. But if they’re too high, you could alienate your customers. Either way, both scenarios can harm a business. Price is not determined by intuition. Instead, it’s dictated by your industry, your competition, positioning, geographical location, the economy, the time of the year and more. These factors are rarely constant, so business owners must be willing to test prices, reassess strategies and implement changes as needed. To move forward with setting prices that your customers will actually pay, follow these tips.
- Establish a Minimum Price Point When setting prices, you must take into account how much it costs to run your business. Calculate the materials, cost of rent and labour needed to produce your goods. Also include operational expenses, salaries and any marketing costs. Then, divide that total by the number of units you plan to sell. This will give you the true cost of your product. In order to profit, you must charge more per unit than the per-unit cost of production.
- Determine Payment Structure Most tangible products tend to fall under one-off pricing, where customers purchase the product once and don't purchase again until the need arises. Services, on the other hand, are often subscription-based, where customers pay a monthly fee in order to continue using the service. Because subscriptions tend to require less money upfront, businesses can often charge more over a longer period of time than one-off pricing structures. While this is great for services, subscription-based pricing doesn't work well for most products. Additionally, depending on the goods you sell, you might want to establish bulk pricing, where you offer discounts depending on the number of products a customer purchases.
- Assess the Value of Your Product If customers see value in your product, they'll be willing to pay for it. Customers will also pay a premium for products that solve real problems in their lives or drastically increase the quality of their lives. Take the time to think about the perceived value of your offerings from the perspective of consumers. The more value your products or services offer, the higher you can set your prices compared to less-valuable offerings from competitors.
- Understand Your Target Customers Who is likely to purchase your products or services? Are you dealing in luxury goods that only appeal to high-income customers? Or do your products and services have more mass appeal? Are you competing with a specific company? Or are all companies fair game? For some customers, price isn't an issue, and they'll be willing to pay whatever it takes to have the best product on the market. For others, selling your wares may take more than just having what’s perceived as a great price. The most attentive business owners will take the time to understand their customers and adjust pricing accordingly. Additionally, how customers use your products or services will play a key role in their price sensitivity. People tend to be more sensitive to prices of items or services they purchase frequently, such as toilet paper or lawn care services. However, they tend to have less price sensitivity to big one-off purchases, such as a car or computer.
- Compare Competitors' Pricing Analyse your competitors to see the quality of their offerings as well as their price points. Determine the key features and benefits of their products, and decide how your products or services compare to theirs. What do they offer that you don't, and vice versa? What is your clear advantage over them? It isn't always necessary to beat the competition. If your products are of much higher quality or you provide a better customer experience, you can charge more.
- Figure out Your Position in the Market Fully understand how you want customers to perceive your brand. If you want to offer the most budget-friendly option in the industry, you will have to beat all of your competitors’ prices. However, if you want to be perceived as a luxury provider, your prices will likely be higher than your competitors. Whatever your favoured position, be sure to develop a solid unique selling proposition to help justify it.