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5 Key Factors to Setting the Ideal Price for Your Product or Service
Put a high price on your product/service and watch customers complain and stop buying. Put a lower price and watch customers conclude your product/service is of low quality, hence the cheap price; you would also see your revenue drop devastatingly. Setting the ideal prices for products/services is a tough decision many small business owners find hard to make, yet pricing is an essential element that determines the success of your business. A wrong pricing strategy can send a business crashing within a twinkle of an eye.
There are different strategies of pricing out there and it can be quite confusing to know which strategy will work best for your business. In this article, we’ll take a look at the key factors you need to consider when pricing and how to know when to raise or lower your price.
A good pricing strategy involves weighing key factors such as:
- Cost
- Value
- Competitors
- Positioning
- Profit
Cost
The cost of running your business is the topmost factor to consider when it comes to setting a selling price for your product/service. You can’t set a price for a product if you don’t know how much it cost you to produce that product. Work out how much it cost you to run the business. These include your fixed costs (expenses that are not dependent on your sales: rent, labour, taxes, salaries, etc) and variable costs (expenses that are dependent on sales: direct labour costs, raw materials, packaging materials, wages of part-time staff, transaction fees, transportation, etc). Cover these costs and then consider the profit before you set a price.
Value
How much does your customer believe your product is worth? How highly do they regard your product? Is your product a daily necessity that customers can’t do without? Does it save them money or time? Answers to these questions bring the voice of the customer into the pricing process. This way you consider your customer’s perception of your product/service, upon which you then set your price. Customer behaviours, expectations, the relative size of expenditures, price-quality perceptions are factors that shape determines the value your customers place on your product/service. Fashions, pharmaceuticals, cosmetics, mobile phones, personal care, cars, are popular industries that are subject to value-based pricing.
Competitors
You can’t ignore the huge impact your competitors have on how much you are going to charge for your product or service. Do a little snooping on your competitors and find out how much they are charging for their products or services, what class of customers they attract, how well they are selling at their price, what extra services they offer for their pricing, and so on. These will provide you with valuable information that’ll show you if you’re on the right path.
Positioning
Price positioning is placing a price on your products or services based on the customers’ perception of your products. It is also adapting your price towards the position you want your products and services to represent in the market. Would you want your product to be seen as expensive, affordable, luxurious, cheap, somewhere in the middle or a high-end brand in your industry? The perceived value of your brand in your customers’ mind will set the position for your pricing strategy.
Profit
If you focus on how much your competitors charge and neglect how much profit you deserve to make from your business, your business might as well be heading for a disaster. Give consideration to how much time you put in creating your product/service, the product’s benefits, and the value it creates, then determine its worth and ask yourself, “How much profit do I want/need to make?”
In adding value to the lives of your customers through the products/services you offer, you also should be getting some value through profits from sales.
In creating a pricing strategy, there should be no room to leave money on the table. On a regular basis, do market research. It will help you keep track of outside factors that might have an impact on the demand for your products/services. A market research can inform you of your competitors’ latest actions and how they affect you. It will generally keep you on the right path.
Note: remember to pay close attention to what your customers are saying and put their feedback into consideration when setting your prices.
How do you determine your prices? We would love to hear from you.
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