Pricing strategy – what is the best price for my product or service?
Of course, this question will depend on your business.
It varies a lot from product to product, and from service to service.
But when picking a pricing strategy, there are some rules and general knowledge points that you should consider before finding the price point that is best for you.
What you need to know before picking a strategy:
Who are your customers?
What are your costs?
Who is the competition?
Knowing your customers
Before you know how to price a product or service, you have to know who you are selling to.
What are they looking for?
What options do they have right now?
Why would they, or why are they choosing you over someone else?
These are just a few of the questions that you should be able to answer to pick the best pricing strategy for your business.
In the end, you can have the best business in the world, you can be the friendliest out of all your competitors, you can have the most locations, or be the most flexible...
… But if there are no customers who are willing to pay, those things count for nothing.
So before picking a pricing strategy, you should do some market research to get to know a little bit about who it is that you are selling to.
Knowing your costs
Running a business isn't free.
That’s why you have to know the minimum amount you have to make in order to cover your costs and keep the business running.
Almost every pricing strategy takes your costs into account–so it is vital that you know them all beforehand.
Knowing the competition
Who are they? Are there any? What price do they sell at?
When it comes to picking a price, checking out the competition can be a good place to start, and we can guarantee that even if you don’t, your customers will.
Looking at your competition helps you see what makes you different.
What do you do better than them, and how can that bring more value to your customers?
What do they do that makes you want to be better?
You can learn quite a lot from looking at the competition, but of course you have to bear in mind that you are only looking from the outside–so you won’t get the full picture.
They most likely have their own strategies and goals in place that will affect their pricing, and you probably won’t have a clear picture of their exact costs.
Now that we’ve covered the general points, let’s look at some of the pricing strategies that will help you figure out how to price a product or service.
Pricing strategies
Different pricing strategies are good for different reasons, and some are more suitable for certain businesses than others. We will look at the following pricing models:
Cost-plus pricing
Competitive pricing
Premium pricing
Penetration pricing
Psychological pricing
Product line pricing
Value based pricing
Cost-plus pricing
What is cost-plus pricing? It’s simply adding a markup to your total costs.
This strategy shows you what price you need to sell at in order to meet your desired profit margin, as well as how to make sure that you don’t sell at a price so low that you don’t even cover your costs.
Here’s how to work it out:
First, find out how much it costs you to actually make your product. These are your variable costs–they change based on how much you produce, and include things like raw materials and packaging.
Then you have to add your fixed costs and your variable costs together. Fixed costs are things like labour and rent.
Now you have your total costs.
At this point it’s time to decide what your desired profit is–this is known as your markup.
And now to get your selling point, add your markup to the total costs and divide it by the number of products you intend to make.
Selling price = total costs + markup No. of products
Cost-plus pricing is a good, basic strategy for working out your selling price.
However, when using this pricing strategy, you have to make sure that you actually sell the number of products that you've used in the calculation.
Competitive pricing
Competitive pricing is where you pick a price based on your competition and the market.
You’re likely to see competitive pricing in markets where the products are very similar, or when there are a lot of competitors offering substitutes.
There are three options when pricing against the competition:
Pick a price point BELOW the competition
Pick a price point ABOVE the competition
Pick the SAME price point as the competition
Pricing below the competition
Setting a price below the competition might mean that you will make a loss on that product or service, but can be a good idea if you can upsell the customer to something else later on.
The initial low price could get customers through the door, and you will regain the loss by keeping them as a customer in the long run.
Another reason to price below the competition is if you know that their product or service is superior to yours in some way. Then to combat their advantage, you can set a lower price so that customers still have a valid reason to go with your business.
Of course, this works the other way too...
Pricing above the competition
Just as a competitor might be superior to you, you might be superior to them. In this case, you can justify setting it a higher price, as long as you’re sure that your customers will also recognise that your product or service is better and therefore be willing to pay the higher cost.
This is where your marketing efforts pay off, as you are recognised as a good quality brand that people are willing to pay a little bit more for.
Pricing at the same level
In markets where the price can fluctuate a lot, it can be a good idea to offer a “price-match”. This is where you allow customers to show you a better offer that they found somewhere else and then you lower your price to match it.
This is effective because you may still get a few customers who are unaware of the competition and pay your asking price–meaning you don’t lose customers to the competition just because they are offering a lower price.
When it comes to looking at the price point of the competition, it is important to consider the package as a whole–look at what other benefits customers might get when choosing a competitor. For example any added value or benefits they receive, such as extra customer support, a warranty, access to a community and so on.
Premium pricing
Premium pricing is where you keep your prices higher than the competition or higher than needed, either because you have a superior product or service, or because you want customers to believe that.
You can also use premium pricing when entering a new market, or offering a something that is not available already. A good example of this is the first flat screen TV by Sony and Sharp, which sold at around $15,000.
When you are the first, or close to first business on the market to offer a product or service, you can start with a much higher price point, but expect it to fall as competition increases and more alternatives are added to the market.
Penetration pricing
Penetration pricing is where you enter a market at a price point that is significantly lower than the competition.
A lot of businesses have done this to get a large share of the market early on, and then over time they increase their prices or encourage their customers to switch to an alternative, more expensive product or service from their own range.
This is very similar to pricing below the competition, where you start off with a low price in the hopes that your customers will stay with you in the future.
Psychological pricing
Psychological pricing is a strategy based on the theory that some prices sound and feel better to a customer.
One aspect of psychological pricing is charm pricing. This is where you reduce the cost of your product or service by 1 penny, so instead of charging £3.00, you would charge £2.99.
That’s because you round down £2.99 to just £2.00 in your head, so a customer might not be persuaded to spend £3.00 for an item, but would be more likely to go for it if it’s just £2.99.
A study on women’s clothing prices ending in 9, conducted by the University of Chicago and MIT, found that when the price ends in 9 it was 40% more likely to be bought.
Dresses were priced at $34, $39, and $44, and the $10 difference between the low price and the high price had almost no difference on demand, with the $39 option being the most popular by far.
Another aspect, and the complete opposite to charm pricing is prestige pricing.
This is where odd numbers are rounded up, so £99.99 turns to £100. This is because round numbers are processed much quicker which allows the customer to act emotionally when purchasing, instead of overthinking it too much.
But this generally applies to higher price items–which explains why charm pricing is also effective.
Also falling under psychological pricing is BOGOF, or buy one, get one free.
This, and other kind of price promotions can make a customer pay full price for one item, because they are getting another at a discount or for free.
Product line pricing
This strategy involves separating your products or services into different levels in the mind of the consumer.
Instead of having a one-size-fits-all price, you could divide your product or service range to suit different customers, with a more basic option at a lower price and a more premium option at a higher price.
Of course this won’t make sense for every type of business, but it can be an effective way for you to maximise profits from the customers who are willing to spend a little bit more.
Value based pricing
Value based pricing is where, instead of looking at the costs of production to determine your price point, you look at the perceived value of your product or service.
The first thing you have to figure out is how much a customer is willing to pay, and then you set your price based on that.
For example, in a restaurant, you would expect a starter to cost less than a main course, even though the starter might contain more expensive ingredients than the main.
The same applies to paintings–they often sell for a much higher price than the cost of the materials, because they have such a high value in the mind of the buyer.
Value based pricing is often used for products or services that involve some kind of an emotion for the buyer, like fashion.
Now we’ve taken you through some various options for your business, we hope selecting a pricing strategy will be easier.
When picking a strategy, remember, just because you start with one strategy or price, doesn’t mean you have to stick with it forever.
Prices and the market are always changing, so your pricing strategy needs to evolve too.
And even the best pricing strategy in the world won’t help if you are not open to as many customers as possible. That’s when a card reader can help you out.
So look at all the data you have available.
Look at the competition.
Talk to your customers.
Then you can be sure that you will find the right pricing strategy for your business.
You can find other great tips on how to grow your business on our blog.
