By Thomas Young, MBA
Setting the correct pricing strategy for your products and services is a great challenge. Pricing has tremendous impact on your profits, because pricing not only determines the quantity sold, but also the direct contribution to your bottom line. Following are a few key points to consider when setting prices.
Set a Pricing Strategy
Start by setting pricing and profit margin goals. What is your target profit margin given your expenses? Determine if you are competing on price or quality. You cannot do both, because quality suffers when prices are lowered. If you are determined to be a low-cost leader, then efficiency in your operations is critical. On the other hand, if you are selling quality, then do not compromise on price. Discounts are a good strategy if you are a low-cost leader, but not when selling quality. Do not wing it. Use smart analytical tools to set proper pricing. Pricing correctly should not be based on intuition. Put in place a specific pricing strategy based on the perceived value offered to your target market. Do not make assumptions and be prepared to research and test alternatives.
Your pricing structure should maximize profits. The price should be set so that profits are maximized based on the given demand relative to price. It is not uncommon for prices to be too low given demand. This results in lower profits. If prices are too high, not enough units may be sold, as buyers are turned away. The key is to price correctly so units sold and profits are maximized, given demand. Does your pricing structure maximize or impede your sales revenues? Find the happy medium and profits are maximized.
Do Pricing Homework
Review your expense budget and price your products and services accordingly. In determining a budget, keep in mind fixed and variable expenses. Review marketing expenses and how those are built into your pricing structure and marketing plan. Advertising, sales commissions, direct mail and other promotional activities are expensive and directly impact your pricing strategy. Review your competitors’ pricing and attempt to determine their profit margin. Many businesses have very thin profit margins and others rely on debt. Have a clear plan for using debt wisely, or if you are fortunate enough, do not incur any debt.
Price to Gain a Competitive Edge
Make pricing a competitive advantage by providing more value than your competitors at relative prices. Research your competition and add value in a unique way that better meets the needs of your target market. Do this without increasing expenses tremendously and do what you do better than your competition. Price then becomes a non-issue in the short term.
Price to Meet Customer Needs
Get feedback from customers about your pricing.Customers are looking for fair pricing. People realize that they get what they pay for. The most important benefit is to receive a fair price for the value of the product or service. Price is equal to the relative value in the mind of the customer.
Prices are Being Driven Lower
Competition, excess inventories and the Internet are driving prices lower then ever before. Keep this in mind when setting your pricing strategy. We are all forced to do more with less. We have to compete smarter, focusing on customer service and knowledge-based services. In these areas, our expertise and our customer’s return on investment will determine a fair price.
Believe In Your Prices
For those of you in sales, keep in mind that you must believe 100% in the pricing of your product or service.Any doubt in this area will lead to customer objections on price and a loss of sales. Customers will sense your lack of confidence. Competition keeps pricing fair. Have confidence in your pricing strategy and communicate that assurance to your customers. Your price should equal the value you bring customers. Follow these guidelines and be prepared for improved profits.
Thomas Young, MBA is a sales and marketing consultant helping companies increase revenues. Send in your questions and comments to [email protected]. He can be reached at 719-481-4040 for a consult.