One of the hardest problems to solve in business is how to price your products, and it’s a problem you have to fix. The right pricing strategy is one of the keys to success because it can transform how much you sell, which sets the foundation of the business. But, get it wrong and you may have to put up the consequences for a very long time. In fact, the bad pricing strategies can destroy a business before it even gets off the ground.
As you can see, it’s imperative that you know what you are doing and it’s made harder by the complexity of technique. There are so many methods and secrets that it’s almost impossible to keep up. However, you have to keep up if you want to take advantage and take your company to the next level. To help, here are a few of the vital details that go into a successful pricing strategy.
One thing most businesses get wrong is to believe that the price drives sales. Sometimes, customers will buy products and services based on the price alone. But, it happens very rarely. The reality is that they buy goods and services from companies which can sell them. Obviously, anyone can make a sale, but it is luring them into making a purchase that is pivotal. A company must be able to explain to customers why they should buy their products. Then, and only then, will they consider the price as they will have an interest. No one will bother looking at the cost if they have no intention of spending any money.
Under & Over Pricing
These are two fatal mistakes that a lot of firms make when it comes to pricing. The greedy go high as they think can make an extra buck or two, while the insecure go low because they believe that they can’t compete. The results are two-fold. The first scenario means customers flock to other businesses once they realize they can get the product cheaper. The second scenario, meanwhile, erodes trust in the brand. Customers see that the product is more affordable, and they start to wonder why you would offer it at such a discount. The only conclusion – you aren’t a quality company. It’s a delicate balancing act because your prices say a lot about the business.
One thing you have to keep in mind is the cost of manufacturing. If you don’t manufacture, think about how much it costs to source the product. The total amount it takes to make a product or service has a direct effect on the overall price. For instance, a product should never be lower than the cost of manufacturing because it won’t make a profit. But, it also can’t be too high as it needs to be in line with the competition unless you can advertise it as a luxury purchase. A good tip is to include abstract costs such as overheads. The cost of electricity might not seem as if it affects the price, but it is a cost you have to pay to create a product. As a result, it is a major factor.
Lots of pricing strategies exist, but you can only pick one. The two main strategies are cost-based pricing and value-based pricing. Cost-based is an approach that takes into account the cost of manufacturing with a small markup for profit reasons. Lots of businesses think this is fair, if not a flawed way of pricing for customers. Value-based pricing is different as you price products based on what customers are willing to pay. Clever firms realize this is the best strategy because it is a win-win situation as increasing sales with value-based pricing means customers pay more. Secondly, there is no moral issue. If the customer is willing to pay twice as much, doesn’t that mean the value-based price is the actual cost? It’s simple – value-based pricing allows you to make more money without exploiting the customer.
Like in all walks of business, your rivals will affect how you price products and services. The reason is due to risk. You can’t take the danger of a competitor encroaching on your market share because they use pricing strategies efficiently. For instance, a product must be close in price to a rival even if you think it is worth more. Your perception of the price isn’t the same as the customers’ perception, which will lead them to choose a rival over your firm. Plus, you have to react to what they do in case it gives them the upper hand. If they decide to use destroyer pricing tactics (undercutting), it is essential you adapt. Reducing prices to the same level might not be an option, yet you can’t sit there and watch as they leave you in the rearview mirror. Always keep an eye on the competition and their prices.
Do you expect a product or service to sell in bulk? If you do, the price is essential. Goods and services that sell in high numbers provide more flexibility as the extra sales can make up for any losses. For example, you expect a certain product to be very popular, so want the price to be high to maximize profit. However, there are things to consider, like the way consumers view the company. If the firm is new, they might not be willing to spend as much as they would with another company. To combat this, you can lower the price to appease customers and lure them online/into the store. As long as the product is popular, you will recoup the money and might even make a profit.
As the boss, you are the one that controls the prices. If you do it effectively, the business will surely benefit.
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