Setting up the right price from the beginning will ensure your customers are happy and your business remains profitable. You are more likely to attract and keep loyal customers with the right pricing strategy. Selling at the wrong price can cause serious financial problems. If you charge too much, you will most likely price yourself out of the market. If you charge too little, you might not even cover your expenses.
A good research will make you more confident about pricing your products. You need to look into three areas to establish the right price: your costs, your clients and your competitors.
You need to know and understand your existing costs so you can make good pricing decisions. Have a look at your costs of goods sold and your overhead. What do they depend on? As an absolute minimum, you need to be able to cover those with your sales. Running a business at a loss can be acceptable for a startup, but it is not sustainable.
You need to know how much your target customers are happy to spend on your product so you can appeal to them. Be clear about your customer value proposition and take it into consideration. If your customers see your prices as too low, they will question the quality of your product or service. They might look for a product they believe is better value. If your prices are too high, they will go shopping somewhere else.
Research your competitors and your industry. Look for their prices online, read marketing materials or just make a phone enquiry. You can make a competitor profile chart and include a pricing section in it. Before making a price decision, answer the following questions: How do your main competitors price their services or products? Is there limited supply, or is the market very competitive? What value do you deliver to your clients compared to your competition? If your prices are too high, you will obviously lose sales. If your price is much lower, you are underselling the benefits you are offering to your clients.
It is most often used by companies who are selling physical products. This is a good pricing strategy for eCommerce. It works by adding a mark-up/or a margin/ to all costs of producing the product, taking all fixed and variable expenses into consideration. You will need to establish the variable costs for each unit sold and make an apportion for the fixed costs. Your mark-up should be based on being competitive while making the projected profit. The price is calculated by adding material, labour, and overhead costs and multiplying it by (1 + the mark-up amount). Overheads are expenses you can't directly trace back to material or labour costs, and they're often operational costs involved with creating a product. Adjust the mark-up depending on the strategy you have decided to use; for example, if you are penetrating a new market, your mark-up should be lower than your competitors.
Service providers commonly use it, and it is based on selling your time for money. It takes into consideration all business costs and the available time. This approach is suitable for professionals and particularly for sole traders. You have to be careful not to overestimate the available working days and hours per day. Do not forget to include annual leave or sick leave. Start by estimating your business overheads for the year (e.g.£20,000) and the desired profit for the year (e.g.£100,000) to establish the total you need to earn (£120k). Calculate the available time by subtracting the annual leave(e.g. 30 days) and sick leave (e.g. 5 days) from the working days in the year (260 days). Now, divide the total earnings by the days, and you will have your daily rate (e.g. 120,000 / 225 = £533.33). Divide that by the hours you work per day, and you will have your hourly rate (e.g. £71)
This is a form of psychological pricing, and it is often used for luxury goods or pieces of art. Price is set much higher than the rest of the market, so it can create a feeling for something unique, special and exclusive. The prestige of owning such a product or using such a service outweighs the actual cost of the item by far. Clients are prepared to pay a lot more for the perceived benefit they will receive.
This is a proven promotional pricing strategy used by large retailers and supermarkets. The idea is to have one heavily discounted item, even priced at loss, but to stimulate customers to visit the shop and buy other products that are profitable.
This is a pricing method used mostly by new businesses wanting to gain market share. It uses lower prices to generate more sales. It is not a long term strategy due to the low profit margin.
Whatever pricing strategy you are using, it is important to have regular price reviews. When reviewing the price you need to consider changes in the costs of running the business, new and existing competitors and your clients expectations.
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