Pricing strategy is of the utmost importance for every business. Since price influences so many aspects of your business, you’re going to want to choose your pricing strategy carefully.
Prices can be determined in many ways. There are so many different strategies because price directly influences essentially all aspects of your model. Businesses are interconnected by nature already, but price will help determine your sales figures, revenue, and ultimately your profits.
That means your priorities and specific situation will determine the optimal strategy for you.
So depending on the lense you come to the conversation with, you’re going to favor a different pricing model.
Here’s a comparison to get started with:
- If you value a high number of sales, you might opt for a lower price.
- But, if you value the perception of your product’s worth, you might opt for a higher price.
Depending on the situation or the business, those could both be a strategy that leads to higher revenue and profit. As with all things in life, it really does depend.
Keep in mind you’ll likely change your prices over time no matter how well you’ve chosen your first price. So be open to change now as well as down the road. Ultimately, your prices should be optimized to maximize profits. It might take time to hone it in, though, so don’t get analysis paralysis. Get started, and adjust accordingly!
The Most Common Pricing Strategies
Since there are so many ways for a pricing strategy to be set, it can be confusing to get started. And you don’t want to stall just because you don’t know how to pick a first price.
Well, here are some common pricing strategies to help you get started. At least one of these pricing models will apply enough to your unique situation to provide you with a leap start.
Competitive pricing revolves around comparing your price to your competitors’ prices. It doesn’t necessarily advocate for positioning yourself above, at, or below their prices. Instead, it advocates for considering each option and then choosing one based on the situation to leverage your advantage. Some of these other strategies focus on employing one of those specific stances in particular, so read on for more information.
Economy pricing aims to engage as many customers as possible. But by trying to price your product at a point where many people can buy it, you might be devaluing it.
If you make a unique, valuable product, why would its price be low?
Some attempt to price low to sell more units, thinking they’ll better cover their costs and then create profit. But this can backfire. If your product is priced too low, people will think it isn’t any good.
This variable type of pricing accounts for the normal, hour-to-hour fluctuations of the market. Uber uses dynamic pricing, where the price of each ride is based on the supply of drivers and demand of riders at any given time.
To put this in perspective, Starbucks coffee costs the same whether there are nine people in line with two baristas available, or if there’s one person in line with 4 baristas available.
This type of pricing frustrates customers who don’t like being surprised and subjected to increases when things are busy. They might be willing to pay more in the moment, but ultimately they’ll remember frustration at higher prices. They won’t remember the times when it was less expensive. This pricing strategy is more variable than adjusting to the market’s changes on a larger scale, such as year to year.
Value-based pricing strategy determines prices based mostly on the perception of the product’s value in the market. It’s not the only consideration, but it does make up most of the method.
For example, think of designer products.
Gucci handbags might be made of very nice leather and crafted finely, but the prices are quite high because people like the image of the brand. A brand’s image can really influence how people perceive the value, and they’re willing to pay for it big time.
This strategy aims to filter out the most serious customers by pricing high. Only people who are very interested and serious about your product will purchase at such a high price point, but this way you can optimize margins and sell less product. Also, this method aims to establish a loyal and strong customer base to build on.
The opposite of skimming, penetration pricing sets prices low to introduce more customers to your product. It also hopes to develop a strong customer base, but in terms of numbers. With a large customer base, you can increase brand awareness and improve the perception of your value. Ultimately, you’d be able to raise prices.
This method arrives at a price by determining a product’s variable and fixed costs and then backing into a price by choosing a desired margin. We’ll go over this method in the next section, since it tends to be a good starting point.
Which of these methods do you currently use? If you aren’t sure, or if you want to make a change, we’re here to help.
Contact Selling Revolution today to book your free call!
How To Price Your Product or Services
Now that we’ve covered those seven types of pricing strategies, let’s move onto practicable first steps.
It’s important to understand the theory behind multiple pricing strategies, but if you need to get started quickly, then try this first. It’s probably the most basic process or formula to follow for a launch price.
Remember that it shouldn’t be your price forever, most likely. As your product or services mature and the market ebbs and flows, your prices will probably change over the years to maximize your success.
Total Your Variable Expenses
Count up the costs associated with bringing your product to the customer. Determine the total cost of the goods and services you’re providing.
How much does it cost you to provide the product or service? These costs vary depending on how many units you’re selling. And don’t forget to account for the value of time. If it takes your quality assurance team member two hours to check an order, and you pay them $15/hr, then the cost associated with that order is $30. If you’re counting your own time, then choose a realistic hourly rate you desire or your efforts.
Here’s an example.
You sell candles, and you employ one person to help you with shipping and handling. You pay that person $15 per hour, and you determine the value of your time spent crafting candles to be $30 per hour.
Glass, Wax, Wick, and Labeling Materials = $2.50
Labor to Craft Candle = .2 hrs x $30 per hr = $6
Labor to Package & Ship = .1 hrs x $15 per hr = $1.50
Shipping Materials & Shipping Cost = $7.25
Total Cost of Product = $17.25
Build Your Profit into the Price
Now, you’re going to choose a margin to determine your price.
First, check your industry to see what a reasonable price range is. And if you can discover what others make for margins, then that can help inform your decision too.
If you started off making a 25% margin on your products, depending on your industry, you’d probably be pretty happy. So let’s start there.
Here’s a formula:
(Cost of Product) / (1 – margin as decimal ) = Price
Back to candles.
Each one costs you $17.25 to make and get to the customer.
So, 17.25 / (1- .25) = 17.25 / .75 = 23
Let’s bring that up to $24.99 for a psychologically appealing price.
Keep in mind that you have fixed costs too when you choose the margin. You’ll have a “breakeven” point at which the number of items you sell is high enough to have the margin on each all add up to cover your fixed costs too. More on that next.
Always Include Your Fixed Costs
Your fixed costs are the ones that are the same no matter how many items you sell. For example, you’ll want to include the costs associated with your facility and business.
Maybe you use accounting services for taxes and payroll.
Rent is zero because you work out of your garage, but you have business insurance.
Let’s say that all comes out to about $125 a month.
Then how many candles would you need to sell to break even? Can you sell more? If not, you won’t make a profit.
Price of Candle = $24.99
Cost of Candle = $17.25
Margin Earned = $7.74 per candle
Fixed Costs per Month = $125
$125 / $7.74 = 16.25 candles
It would take selling 17 candles, then, to reach (and surpass) your breakeven point.
Are you going to sell enough candles to make the profits you desire?
This is a good starting point. Remember, you’ll need to adjust later.
Some Pitfalls To Avoid in Pricing Strategy
After so many businesses that have come before you, plenty of people have tried and failed. Here are some mistakes you can avoid by learning from those who have already done so.
Just because something didn’t work for someone else doesn’t mean it wouldn’t for you, though. Your situation might be different. But use this information as a way to indicate potential barriers.
Charging Less than Competitor
It’s tempting to undercut competitors so to try to take business from them because obviously your product is better. Who wouldn’t pay less for more?
As it turns out, lots of people. Potential customers might think your product is worse if it’s less expensive!
Setting a Price Based on Your Product Cost
We’ve outlined a way to find a price based on how much your product costs and then factoring in how much to sell to cover fixed costs too.
However, that’s only a starting point. If you stay there too long and you’re selling a lot, then you could be losing potential money. By choosing a margin you want to make and an hourly price for your own labor, then you might be limiting yourself.
What if your time is worth WAY more than you think because you’re not feeling as confident as you could? People might be willing to pay for a price that justifies a margin you might not ever think of.
As you establish yourself in your industry and gain customers, gradually raise your prices. It’s necessary to keep growing your business and showing people your worth.
Also, costs tend to sneak up. That means your margins might be gone before you know it if you run into a few stumbles one month.
Not Many Product Offerings
By not offering similar products at different price points, you’re denying people the opportunity to pay you more for a product that is more valuable. And maybe you can get better margins on it.
You’ll achieve better results by being flexible and allowing people to pay you more if they’re more comfortable. You don’t have to reinvent the wheel each time. Each version of your service or each tier of your product will be built upon each other.
You’re hurting your credibility if you use clickbait strategies. They leave people feeling lied to once they read the fine print.
If people feel deceived or fooled, they aren’t going to trust you. That means they won’t buy your product!
Not Enough Pricing Tests
If you don’t test enough prices, then you wont know if you’re maximizing your profitability.
Maybe a small price bump will actually increase the number of sales you make, leading to a big boost in revenue. That’s because a higher number of sales and a higher sale price for each sale is maximizing both aspects of your revenue stream. It’s not just a higher price or more sales. It’s both.
Or, maybe a small price reduction would increase your sales enough to cover the small loss of each unit’s individual margin. For tests, only change one thing at a time so you can track change and attribute its cause more accurately.
If any of this sounds overwhelming, don’t worry.
Regardless of your pricing strategy goals, we’re confident that we can get you the results you want. At selling revolution, our expertise and experience allows you to avoid pitfalls like the ones listed above, and it will allow you to feel confident that you aren’t wasting your earning potential with a faulty pricing strategy.
Contact us today to book a call! We’re here to serve you.