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Chapter 7: How to Price Your Product & Service
A business might set or adjust prices when they start up, when introducing a new product or service, to achieve a new business objective, or in response to changes in the marketplace or the general economic climate. Whatever the occasion, setting prices for your products or services is possibly one of the most important business decisions you make. It does have a considerable impact on your profitability and thus can be a decisive factor in the financial success or failure of your business.
Determining a pricing strategy should not be carried out in isolation but in relation to your evolving business strategy. You need to be clear about what your pricing objectives are, how they relate to your general business objectives, and how they tie in with your marketing and sales plans.
Pricing Strategies
Cost Plus Pricing
This takes the most cost of producing your product or service and adds an amount that you need to make a profit. This is usually expressed as a percentage of the cost. It is generally more suitable to businesses that deal with large volumes or which operate in markets dominated by competition on price.
It is important to be aware of the effect any price change will have on variable costs and factor this into your calculations. Care must also be taken not to overlook hidden costs and inadvertently overestimate potential profit per sale. This approach also disregards potentially important factors such as business or brand reputation, market positioning, and the value of the product or service to the customer or client. Indeed, setting prices based just on costs can result in selling a product or service at less than the customer or client is willing to pay, thereby failing to maximise potential revenue.
Value Based Pricing
With value-based pricing you focus principally on assessing what the product or service is worth to the customer or client and set the price accordingly. The aim is to avoid charging too little and so missing out on potential revenue while not setting the price higher than the customer or client is willing to pay. The key is to identify the benefits you offer the customer and ensure they understand and appreciate them.
If you have clearly-defined benefits that give you an advantage over your competitors, you can charge according to the value you offer customers. While this approach can prove very profitable, it can alienate potential customers who are driven only by price and can also draw in new competitors.
In a competitive environment it is especially important to differentiate your product or service by demonstrating unique features and benefits wherever possible. The more you can enhance the exclusivity of your product or service or demonstrate genuine added value that your competitors do not offer, the more you will stand out in the marketplace and the easier it will be for you to command higher prices.
- License: Master Resell Rights
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