How to determine the pricing of your products and services
Pricing of goods and services is part of the business balancing act. You need to ensure you are comfortably covering your costs so you can make a profit, whilst also remaining competitive in your marketplace.
This can become increasingly difficult when the economy is struggling as it can affect the costs incurred in your supply chain.
A couple of questions that business owners will likely have asked themselves at least once could be:
- With the cost of running a business rising, do we pass on those price increases to our customers, or do we absorb some of the cost rises?
- Will we lose business if we increase our prices to cover our increasing costs?
Achieving positive answers to these questions depends on the reaction of your customers, which can dictate the difference between success and failure.
In our concise guide, we look to help you get your pricing just right for both your business and your customers.
How can you decide on your prices?
There are a number of things to consider when deciding on your pricing, including:
• What is the cost of goods or services to you? – Do a full audit of your suppliers and what they are charging you. This is vital as you need to know if your prices will comfortably cover your outgoings and generate profit.
• What are your overhead costs? – An overhead is any cost that is not directly related to the creation of your goods and services. Overheads can be fixed, variable, or a hybrid of both. Examples of overheads are rent, utilities, administrative costs and insurance.
• What is the desired profit margin for your business? – There are two types of profit margin, gross profit and net profit and many factors combine to affect what your profit margin will be. Net profit can be calculated by Net Income / Sales = Net Profit Margin. The net profit margin provides a better representation of a business’ financial health than sales revenue, as a business can increase its sales whilst decreasing its profit margin.
• What are your competitors charging? – There are many ways you can find out the pricing of your competition, including:
1. Your competitor’s websites.
2. Ask them for a quote as if you were a potential customer.
3. Use Google searches.
4. Look at the website of your competitor’s partners and resellers if you know who they are.
5. Customer forums such as social media.
6. Sign up for their emails, typically emails are used to promote offers.
• What is your target market willing to pay? – The best way of finding this information is simply to ask.
1. Interview your target market via focus groups and email surveys.
2. Study your competitors. What are their prices and what Packages do they offer?
3. Look at online groups and forums to see what customers are saying.
4. Look at your own sales records. What has been the average order value (AOV) for each of the past three years? Has it changed? Also, if you’ve increased prices, has it affected your volume of sales? Did a recent offer you promoted increase sales volume?
5. Look at Google searches. Are popular searches mentioning cheap versions of your product such as “Where can I buy a cheap dishwasher?” Whilst this only gives a snapshot of what your target customers are willing to pay, it can hint at a trend in your target market.
Once you’ve considered these factors, you can begin formulating prices that meet your needs and those of your customers.
What are the pitfalls of reducing prices?
Retail is a perfect example of a sector that reduces its prices to increase the volume of business. It is also an example of what issues can be created when you reduce your prices.
The business that reduces its prices might experience a slight short-term bump in sales, but in the long-term it runs the risk of being forced to price future products lower as a result, because that is what the customer now demands.
So, even if the economy strengthens and the general public feel they have more money in their pockets to spend, they will frown on product prices if they return to their original, higher amount, which can compel even the most loyal customers to look elsewhere for a better deal.
How can you avoid the need to reduce your prices?
Create value for your customers
Reducing your prices should be viewed as a last resort tactic and focusing on creating value for your customers should be explored first.
You can create value by:
• Delivering high quality services and products that are built to last.
• Improving your delivery times.
• Using sustainable, ethically sourced materials for your products.
• Providing high quality customer service, especially when customers need account advice or if they need to return or exchange an item.
Reduce the financial risk to your customers
Reducing risk for your customers can make a difference when it comes to a customer completing a purchase, as it can alleviate any lingering doubt in their mind.
You can reduce risk by offering money back guarantees; positive reviews in platforms such as Google, Feefo, Trustpilot and your own website; trial periods where a customer can ‘try before they buy’; and demonstrations.
Offer extras, bundles and bolt-on products and services
You can create value for your customers based on price, via packages and bundles such as ‘2 for the price of 1’ or ‘3 for 2’. While this tactic may reduce your revenue per item, it can significantly increase your income via increased order value.
Another way of adding value is to offer ‘bolt-on’ services. For example, you could offer a particular niche service that is only available to buy if the customer purchases another product first. This way you can increase value to your customers whilst also increasing your order value and revenue, and you won’t be sacrificing your core pricing.
Offer a niche service
Offering a niche service can really make you stand out from your competitors, but it can be a challenge to identify a niche service in the first place. On top of this, it can take a lot of commitment of time and money to promote the service and it can take time before it gains traction, but it can be fruitful in the long-term.
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