Whatever type of business you run, whether it is online or offline or service or product-based business, you need to master the art of pricing if you want to be successful.
Why You Need to Master the Art of Pricing
Finding the sweet spot between generating enough sales and making a good profit can be challenging, though. If you price your products or services too high, you could end up losing customers to competitors.
On the other hand, if you charge too little, you could fail to achieve a healthy profit. Furthermore, the prices you choose help to position your brand when you are entering a target market.
So, by using the wrong pricing strategy, you risk harming your brand image. When you master pricing, you will attract your target audience much more easily, build a positive brand image, and generate more revenue.
To know what price is best for your products or services, it is pivotal you learn about different pricing strategies. There are various tried and tested methods, some of which work better for some businesses than others.
By gaining a good understanding of different pricing strategies, you can better understand which strategy works best in conjunction with your type of business. Here is a look at three of the most popular strategies.
Many businesses are charging too little for their services or products these days because they are trying to compete in a crowded market place and they base their prices on cost-based pricing; which means setting the price based on the cost of labor and materials. But there is no point in attempting to compete on price unless you are the very cheapest bar none.
Furthermore, small businesses often undermine their value when they try to beat competitors with cheap prices. Value-based pricing on the other hand, although it is difficult to pull off, can allow you to scale your business within a matter of months, as mentioned in this blog post.
The strategy involves setting your prices based on the perceived value of your services or products, from your customers’ perspective. To be successful with value-based pricing, you need to do lots of market research, understand your customers, and continually check your competitors.
Also known as competitive pricing, competition-based pricing is one of the most popular pricing strategies.
You basically let competitor prices guide the prices you set for your services or products. So, when you know how much a competitor is charging, you have the option of matching that price or slightly increasing or decreasing your price.
When you use this pricing strategy, you can easily tap into your competitors’ target market pool. Competition-based pricing also helps to keep your pricing relevant to the present rates and standards for your industry.
The one main drawback of this pricing strategy is it rarely takes the actual costs incurred into consideration, so you could end up making less profit than your competitors.
One of the simplest pricing strategies is cost-plus pricing. It basically means you cover the cost of providing your service or product and earn from a predetermined profit margin.
To come up with a price, you then simply add the cost to the profit margin. With a few quick and simple calculations, you can arrive at a price that ensures you cover your costs and gain a profit with each sale.
However, cost-plus pricing does not take your competitors’ prices into account. Nor does it consider how your target customers feel about your prices. So, if your prices are higher than the competition, you could lose sales due to your products or services being deemed too expensive by customers.
The Importance of Pricing
It should now be clear why you need to master the art of pricing. With the right strategy for your particular business, you can keep customers satisfied, build a sustainable long-term business, and achieve your financial goals.
When you know what pricing strategy you are going to use, you can also better estimate your fixed and variable costs and your revenue. You can make better forecasts for any additional future expenditure too.
Taking all of the above pricing strategies into consideration, the ideal prices for your business should be based on:
- Understanding when customers or clients feel they are getting the best value.
- Knowing how your pricing strategy can make you stand out from your competitors.
- Generating enough sales and profit margins to meet your financial objectives.
The precise pricing strategy you choose is up to you. As long as you take the considerations listed above into account, you will be able to come up with a pricing model that allows your business to be competitive and generate a healthy profit.
It can take time to master pricing strategies, but when you do, your business is sure to become more successful.