A key component to pricing your product right is to constantly review prices and your underlying profitability. It's not enough to look at the overall profitability of your company every month or so. In order to keep ahead of the game you need to focus on the profitability of every product you sell almost on a daily basis. You have to make absolutely sure you know the amount to which every product you sell is contributing to the success of your business.
Keep testing new prices, new offers and new benefits to ensure you sell more of your product/service at the best price. Test new offers each month. Raise the price and offer a new and unique bonus or special service for the customer. Measure the increase or decrease in the volume of the product you sell and the total gross profit you generate.
Of course, one size does not fit all. You can only go so far pricing all your products based on a fixed markup from cost. Your product price should vary depending on a number of factors including:
- What the market is willing to pay
- How your company and product are perceived in the market
- What your competitors charge
- Whether the product is "highly visible", frequently shopped and compared
- The estimated volume of product you can sell.
Your review of pricing will reveal whether it's time to hike or lower prices. You will learn what's working well and put the breaks on what isn't working. Analyze the profitability of your existing products - which of your existing products are making money and which are losing money? You need to fix the latter ASAP!
If you are having a hard time selling a product at an acceptable profit, the problem may be that you are not buying the product right. Re-evaluation may reveal that your costs are too high rather than the price is too low.
In order to manage your business prudently you will of course need to raise prices from time to time. Continual review however ensures that you remain competitive and make a profit.
Keep a keen eye on sales volume immediately after making a price change. If a price increase is too high, customers will react pretty quickly. Watch your competitors too - if you've made a positive change in prices, competitors are likely to follow suit. You need to keep ahead of the game.
During a recession however, the rules are different. Stagger any price increases in order to avoid alienating your existing customer base. If the costs of producing your product have risen, the customer generally accepts that the price will have to increase. On the other hand, if the customer perceives (rightly or wrongly) that your company's costs have gone down whilst their price has gone up, they are likely to "vote with their feet" and go elsewhere.
Have you priced your goods too high?
Perhaps it's now time to discount your products or give customers something for free. Generally, lowering prices is not advisable unless you are using this strategically to increase market share, have a price sensitive product or your competitors are lowering their prices. Remember, if you offer less for the same amount you are effectively reducing your costs without appearing to reduce the value to the customer. Restaurants use this strategy in terms of portion sizes but it can be applied to service industries as well.
Remember to:
- listen to your customers.
- keep an eye on the competition.
- always have a budget action-plan in place.
You owe it to both yourself and your business to be continually reviewing pricing. How you set the price of your product or service could be the difference between success or failure.
Sources
- http://www.clickz.com/clickz/column/1692278/pricing-policy-seven-factors-consider
- http://www.pricingforprofit.com/
- http://www.inc.com/guides/price-your-products.html
- http://www.ehow.com/how_7887467_conduct-business-process-review.html
- http://learnmarketing.net/Price.htm
- http://www.businessdictionary.com/definition/pricing-strategy.html
- Value-Based Pricing by Harry Macdivitt. Available to purchase from Amazon here: http://www.amazon.co.uk/Value-Based-Pricing-Creating-Communicating-Capturing/dp/0071761683.
- Harvard Business Review on Pricing, Nov. 2008. https://hbr.org/archive-toc/BR0811.