Launching a business can be challenging. Unfortunately, figuring out strategies for pricing your products and services is no walk-in-the-park either.
Pricing is one of the most critical business decisions because it directly impacts your sales volume.
Setting your price too low could cause a setback in your revenue, and if you put it too high, you may miss out on valuable sales.
Most entrepreneurs hardly ever bother so much about their pricing strategy. Instead, they probably check the price of a similar product online and then adjust the price by a few margins before it is ready for sale.
Price is a powerful growth lever when you set your pricing right. So, if you are a new business owner and find coming up with a price for your product or services quite intimidating, here are nine pricing strategies to help you better understand how to set the correct prices.
1. Know your costs
Products and Services are pretty different when putting a price on them. However, the primary thing is to know your costs and then consider your profit.
For a product, this means understanding the cost of production, process, overhead, raw materials, human effort, packaging, etc., and then mark-up the product and how many you need to sell to turn a profit.
On the other hand, services give you great flexibility in setting your prices. The downside is that there is no formula for setting prices and applying them in your business.
Pricing services can be more complex than pricing products because you can often calculate the cost of creating a physical product. In addition, services are more subjective to the worth of your staff’s expertise, rent, and time value.
At the very least, you want to ensure that your price covers all direct or indirect costs.
2. Competitive Pricing
Instead of considering costs or customers, competitive pricing focuses on the existing market for your product or service.
Your homework is to research your competitor’s pricing strategies to determine your price range. The range should have both high and low ends.
3. Rate-based Pricing
This is also known as hourly pricing and falls into the Service providers’ category. It is common to find Consultants, Freelancers, and coaches using this pricing model to trade their time.
The good news is that you get paid for every hour of work, which is very lucrative. However, clients are not so keen on hourly pricing because they are wary of the service providers who might want to work more hours to make more money instead of being efficient.
4. Price skimming
Skimming introduces innovative products at a high price until there is market competition, and the price gets reduced over time.
Think of smartwatches. The launch of a new type of smartwatch can be set to a high price by the manufacturer since there is no other competition yet.
This pricing model is suitable for businesses that are entering emerging markets. As a company, It allows you to latch on to early adopters before future competitors join an already-developed market.
5. Penetration pricing
This pricing strategy is the opposite of skimming. It involves starting at a low price to penetrate an existing market. The price is set low to attract customers and gain market share.
This strategy leaves consumers spoilt for choice and the flexibility to switch between brands offering the same product at a lower price. The advantage of this strategy is that it can promote brand loyalty effectively.
Once the objective of being at consumers’ top of mind, the price is then raised.
As much as this strategy can yield success, you should be aware of the risk factor, like taking losses upfront to have a firm footing in a market.
6. Value-based Pricing
Value-based pricing centres around how much customers are willing to pay, as opposed to what it costs to create a product or render a service. The entrepreneur has a massive advantage when value-based pricing is implemented well.
To do this, you must understand your target market and competitors’ pricing.
This focuses on the price you believe customers are willing to pay based on the strength of the benefits your business offers them.
If you have clearly-defined benefits that give you an edge over your competitors, you can charge according to the value you offer customers.
Though this approach can be profitable, you can lose potential customers whose purchases are determined only by price and give room for new competitors.
This pricing model is best for merchants who offer unique products or SAAS.
7. Premium pricing
This pricing is for businesses that create top-quality and unique products and market them to high-income earners.
If you want to adopt this pricing strategy, be sure you are developing high quality that customers will perceive to be high value.
Along with this pricing, you will likely need to develop a brand strategy that positions your product as “luxury” or a “lifestyle” that will appeal to your ideal consumer.
8. Pay What You Want Pricing
Think of this as a donation-based pricing strategy.
It allows the customer to decide the price of the product or service they are paying for.
Including the “suggested price” as part of your “pay what you want” strategy can increase your profit margin more than when you set a price.
9. Consider other factors
Asides from the cost of production, there are other price determinants you need to factor in.
For instance, the impact of VAT on your price, price differences for different areas or markets, online price, etc.
Do you intend to reduce product profit margin to get a higher margin on others? What about payment for customers, whether instant or in instalments?
All these are things you need to consider. But, most importantly, focus on your cash flow.
Stay on your toes
For sure, prices cannot be fixed for long.
Things change, be they demand or inflation in the economy, influencing your price. Therefore, you will have to adjust your price to keep up with the market.
Be abreast of current trends in your market and take customer feedback often to ensure your prices are favourable.
All these different strategies have pros and cons, but knowing your needs ahead will inform your decision on which methods suit your business.
Above all, be sure the strategy covers your costs and includes a margin for profit.