One of the secrets of a successful and profitable business is the right pricing of the products. When done correctly, product pricing can improve your sales performance, creating the foundation for a business that will prosper in the long run. Otherwise, get your pricing strategy wrong and you may create problems that your business may never be able to overcome.
To help you carry out a systematic process, here is a checklist that you should keep in mind when setting the right prices for your product.
1. Don’t Set Your Price According to Your Competition
Though it is important to look at the competition, it must only act as a baseline that will help you justify why you charge lower or higher than your competitors.
If you properly position your product in the market, then the price will not be a significant deciding factor of your target market. In today’s ever-competitive market, being cheap is not necessarily enough to win your customer’s loyalty. In fact, even the most practical customer will be doubtful about the quality of your product if you price your product lower than the competition.
2. Factor in All the Product Cost
This includes both directs costs – what you pay for creating your product or service – and overhead expenses such as utilities and rent.
When computing the direct costs, you should answer questions like the costs of the raw materials and supplies, the costs of logistics of those materials, and the time it takes to service a customer. After knowing your direct costs, you need to look at the other costs essential to keep your business running. This includes rent expense, the budget allocated for your sales and marketing efforts and the technologies used to process tasks.
3. Re-evaluate Your Previous Projects (For Service-based Companies)
Another way for service-oriented businesses to set the appropriate pricing is to evaluate the prior projects. Reexamining the projects delivered and contracts fulfilled in the past will help you understand the actual profitability to expect in your present and future projects.
It’s in this exercise of looking at what was charged set against what it cost that many lessons about pricing are learned, processes can be improved, and suggestions can be shared to support better pricing structure in the future.
4. Cover Opportunity Cost
Opportunity cost refers to the loss of potential gain from other alternatives when one alternative is chosen. Make sure to factor in this cost when setting your price, especially when closing a sales deal with a client.
Once you have assigned the resources to a project or a contract for less than what you would normally charge, you lost the opportunity to use those resources on projects that will bring more profit to your business.
If your business offers specialized services which are not needed on a regular basis, the opportunity cost of having that resources available should be factored in your pricing. For instance, if you provide services like call centre outsourcing, you must consider the cost that your client will pay if they choose to do their call centre operations in-house.
5. Consider Value-Based Pricing
Many companies often emphasise the low tag price of their product/service to entice people to buy. However, selling based on price alone might connote that your product is off-quality. In your marketing strategies and tactics, make sure to highlight first the unique features and the benefits that the user will get before you go to the cost-benefits of buying your product or service.
By showcasing the unmatched value of your product, then you can easily justify its price. To exhibit the value of your product, allow your target customers to try your product on a limited timeframe or with restrictions on some features. In doing so, you can gauge if your product or service provides great value and experience to your customers.
6. Regularly Your Pricing Strategy
The changing costs of raw materials and overhead can easily influence the profit margin you set for your product or services. To make sure that you are still generating adequate profit, reexamine your pricing strategy every six months or annually. If at all possible, do so when you are renegotiating contract terms with your suppliers and vendors. When spring cleaning your business, you may also consider charging for services that you have been providing to your customers for free.
Consider all these tips when setting your price and your business will certainly see improvements in its bottom line. Want to gain a competitive advantage in your pricing strategy today? Healthy Business Builder can help! Call us at 1300 833 574 or send an email at firstname.lastname@example.org