Deciding on the right prices for your product can mean the difference between the strengths and weaknesses for your small business. Pricing strategies are a mix of art and science. Choosing the right pricing strategy can be sometimes daunting especially for new entrepreneurs an example is when you have low prices customers assume poor quality and high prices may lead to loss of customers.
How do you really choose your prices? Do you look at your competitor’s prices and choose a comparable price or do you aim lower? Do you factor in cost of production, supply materials and profit margin? Are you afraid of pricing higher because it might fewer sales?
No matter what type of product you sell the price you charge your customers or clients will have a direct effect on the success of your business. Though pricing strategies can be complex, the basic rules and indicators are straightforward. In this article I’ll explore the tips and tricks of product pricing for small businesses.
HOW TO PRICE YOUR PRODUCT THE RIGHT WAY
Customers definitely won’t purchase products or services that are priced too high. You would never make profits if your sales prices are too low to cover all of your business costs. Along with the essential 3ps in marketing (product, place and promotion), price has been proven to have a profound effect on the success of your small business.
Know your costs.
Before setting a price for your product, you have to know the costs of running your business. If your prices don’t cover cost, your business cash flow will be cumulatively negative, you are likely to exhaust financial resource and your business may ultimately fail.
An essential rule of pricing is that you need to cover your costs and then factor in profit. It means you must know how much your products cost and how many products you have to sell to make profit.
Get familiar with your customers and competition
Most important question for a business owner is the ‘who am i selling to and how much are they willing to pay’ question. You must dedicate time to research to studying how much you potential customers are willing to pay for your products. You can determine this by looking into how much they are paying for products and services similar to yours. Matching prices may be dangerous, you must be sure all your cost both indirect and direct is covered.
The fastest way is to have a rough estimate of what your product pricing should be is to look closely at the competition. What additional value are they giving to their customers? Are their products comparable to yours? What pricing strategy do they use? Looking into these questions will give you a clear picture of what your pricing model should look like.
Know your market
Clearly, you can’t see everything going on in your market, be you can keep track of outside factors that will impact the demand for your products in the future. Economists talk about internal and external factors that are likely to affect the price of a product. Market conditions like pure competition, monopolistic competition, pure monopoly and oligopoly are some of the major factors when it comes to product pricing.
Because pricing decisions require so much time and market research, the strategy of many business owners is to set prices once and ‘hope for the best’. However, such policies risk profits that are subtle.
Thus when is the best time to review your prices? Do so if:
- Your cost change
- You introduce a new product or product line
- You decide to enter a new market.
- The economy experience either a recession or an inflation
- Your competitors change their prices (please note that this is relative as you can sometimes use this to your advantage)
- Your sales strategy changes
- Your customers are making more money because of your product or service.
In conclusion, having a good pricing strategy helps you determine the price point at which you can maximize profits on sales of your products or services. Employing simple market research and competitor analysis will help you find your pricing sweet spot. Your business must be attentive to your competitor’s actions in order to have the comparative advantage in the market.