Getting Your Pricing Strategy Right

As a foundation for your pricing strategy, you must be brutally honest about what it costs to produce one unit of your product or service. This figure must cover much more than your raw materials or your time. 

 

A unit cost must include your fixed costs, sometimes called ‘overheads’, such as your business premises, office systems, taxes, insurance, and administration. You will have to pay these costs, regardless of how many units you produce or sell. 

 

You must also include the variable costs or expenses that will go up or down in proportion to the units you produce. To make it more difficult there are also costs such as electricity, for example, that could be both fixed and variable. 

 

When you have accurate information about all your costs, you will know the minimum price you must achieve. But that’s just the beginning. 

 

Being perceived as expensive can become ‘not worth the money’, and your customers will look elsewhere. Equally, being perceived as low cost can be interpreted as ‘poor quality’, with your customers moving to what they think are more desirable ‘premium’ products or services. 

 

The best way to understand how your product or service is perceived and how it should be priced is to ask your customers. Market research doesn’t have to be expensive, but you can receive valuable feedback from your target audience about their priorities and what they are currently spending. 

 

Your competitors might have fewer overheads or a wider product range that allows them to absorb some variations in price. Their strategy might be to increase volume by setting a lower price. Others might add additional products or services to increase their perceived value. 

 

It’s important to know how other similar products or services are priced. However, you should avoid making assumptions about how the prices have been set because this could lead you to make the wrong choices yourself. 

 

The problem you solve for your customers will give you a clear idea of how to explain the benefits you provide and how much they are worth. Many business owners tell customers what their products or services look like and do (features and functions), rather than the difference they will make. Becoming part of the solution to your customer’s problems will turn them into loyal customers and referrers and they will help your business to grow. 

 

Your existing customers are likely to spend 50% more with you than new ones, so making customer loyalty part of your plans is important. You might want to think about the total amount a customer will spend with you and consider special prices to keep them coming back for more. 

 

If you have plans to grow or diversify in the future, you might need to think about how your pricing and profitability will contribute to those plans. 

 

Please get in touch if you would like to discuss your pricing strategy. 

 

Until next time ...