How to Set Your Pricing Effectively
Pricing strategy is where finances and marketing come together to help you reach your business goals.
Picking the right pricing strategy for your business will help you to attract customers, win more sales, and ensure your profits exceed your expenses.
Your accountant sees prices and does math calculations for profitability in their head. Your marketer sees prices and feels the emotions behind the number that will influence shoppers one way or the other. Make them both happy when you choose a pricing strategy that addresses both areas.
How Pricing Influences Your Business
The prices you set for your products and services will influence the following aspects of your business:
Profit
The first rule of pricing to respect is that you charge more for your product than it costs to provide it. For a product that would include labor and materials. For a service-based industry it would include payroll, education, and tools or equipment used when rendering services.
Brand
Your pricing tells shoppers a lot about your brand. Look at the difference in pricing between Dom Perignon champagne and Costco’s Kirkland Prosecco. Arguably, they’re both fizzy fermented grape juice. The cost of production may be very similar. But Dom Perignon’s brand is high-end luxury, Costco’s is affordable quality. With luxury brands you are often paying for the ability to humble-brag that you can afford something so expensive.
Quality
Most of us can say that we don’t shop at the dollar store for quality items. Low prices, especially compared to the competition, are not going to express a higher-quality item. It may though communicate a better value, convenience, quantity, or disposability that a consumer is looking for. On the other hand, simply pricing higher even if the product hasn’t changed can lead shoppers to believe the quality is improved.
Stability
Keeping prices the same during economic ups and downs can denote security and stability for your company as a whole. However, prices often have to change in order to stay profitable. How much you change your prices, how often you change them, and the timing of when you change them can all influence how shoppers look at the stability of your business.
Competition
Always look at your pricing compared to your competition. Depending on your industry and target audience, you may not always want to be the lowest price out there. Pricing higher may make your competition look inferior in quality. Or may attract higher-income clientele willing to pay for higher profit margins.
Customer Value
Your pricing can affect shoppers’ perception of how you view your customers. Offering special deals and discounts to loyal customers shows you value them and their business.
Ethics
If it’s obvious from your pricing that you are only interested in making a profit, your company can be seen as unethical. If your pricing takes into account charitable donations, fair wages for your employees, or being sustainable and eco-friendly, it can increase your reputation as an ethical business.
How to Pick a Pricing Strategy
1. Figure out your financial goals with your accountant or bookkeeper to find out what pricing will be profitable.
2. Work with a marketer to nail down your company’s voice, brand, target audience, and positioning.
3. Research the competition, record their pricing, and analyze their strategies.
4. Do some market research. Ask potential customers how they currently perceive your brand and offerings. If you’re already selling, get their thoughts on your current pricing.
Different Kinds of Pricing Strategies
Cost-plus pricing
The most basic pricing choice. Calculate the cost for an item to be sold, add a fixed percentage to get your price. All you’re deciding is how big your profit margin will be. This method is simple and doesn’t take too much time or effort to figure out. But you may be losing out on potential profits based on how customers value what you’re selling, which can change from time to time.
Competitive pricing
This means basing your price on what your competition is doing. This can take three forms: cooperative pricing is when you match your competitors. Aggressive pricing means always keeping your prices lower than the competition and refusing to raise them even if the competition does. And dismissive pricing is almost the opposite. You are ignoring competitors prices in order to separate yourself from them.
Price skimming
For those entering new markets, price skimming sets the price high and progressively lowers it as the market grows and new competition enters. This takes advantage of the market of early adopters and helps cover development costs.
Penetration pricing
This strategy starts pricing low in order to quickly build a customer base and attract attention. This may build demand, get customers to switch from other brands, and/or increase sales volume enough that you can lower your cost per unit. You can also set a strategy of penetration pricing for your main product and price mandatory accessories and addons at a higher margin to make up for the lower cost.
Value-based pricing
This is all about how valuable a customer perceives your offering to be. The value increases the more well-suited it is to your ideal customer’s wants and needs. This takes research and planning and a deep understanding of your target audience. You need the price to match their perspective. This may involve changing your product or service to match the price.
There are even more pricing strategies within these broad ones, including bundle pricing, dynamic pricing, economy pricing, and premium pricing. There is some flexibility to experiment with different strategies, even if you’ve already been in business for awhile.
If you want to work with a bookkeeper that goes beyond the basics and will work with you on concepts like price strategies, get in touch with Pioneer Accounting. We love to help our clients find success in every aspect of their business.