No matter what product or service you sell, the price you charge your customers or clients will have a direct impact on the success of your business.
A truly effective pricing strategy should:
- Communicate your value
- Position you in the market
- Reinforce your revenue strategy
- Allow you to invest in continuing innovation
However, it's never a simple task to get your pricing right and there can be several trip-ups before an optimum price can be established. "It's probably the toughest thing there is to do," says Charles Toftoy, associate professor of management science at George Washington University.
It's really a no-brainer that your prices have to cover your costs so you always need to keep abreast of the costs associated with running your business. To determine how much these are, include fixed costs: property and/or equipment leases, loan repayments, stock, utilities, financial costs, and salaries/wages/commissions. Treat profit as a fixed cost too. Variable expenses include: seasonal fluctuations, the costs of markdowns, shortages, damaged merchandise, employee discounts and cost of goods sold.
In Utpal Dholakia’s article for the HBR “When Cost-plus Pricing is a Good Idea” he emphasises the common sense and logic associated with cost-plus pricing. This Professor of Marketing at Rice University, Houston, believes that for companies with a cost advantage or an interest in using price transparency as a differentiator, cost-plus pricing is a powerful, strategic tool. He states “when consumers believe prices reflect cost, they are more likely to factor quality into their decision, instead of just buying whatever’s the cheapest.”
Even though it's a healthy strategy to keep a close eye on your competitors it's not ALWAYS necessary to match or undercut them. How can you ever be certain that your rivals are more astute about pricing than you are? Your product or service may not be identical to theirs and if you feel compelled to discount because of them you risk starting a margin-killing price war where there are no real winners except for customers who expect everything for the lowest price possible.
If your product clearly demonstrates more value than the competition, a higher price will help indicate a superior product. If a competitor's product proves more valuable, try pricing your product just below theirs as a less expensive yet still high-quality option.
If your competitors are bigger than you, especially in terms of volume, this allows them to lower prices below what you can realistically afford. Instead, focus on adding other types of incentives or features likely to increase value. Tim J. Smith, Founder and CEO of Wiglaf Pricing and an Adjunct Professor of marketing at DePaul University, says “Companies need to understand the value of the benefits their offering delivers to customers compared to alternatives, and then price according to that value.”
BlackCurve recommends that if you are benchmarking against competitors you should change the prices for the products that matter, not be constantly changing the lowest priced goods that contribute the least to your revenue.
It is important therefore to review your prices if your competitors have changed their prices. Other reasons to review your prices are:
- You introduce a new product or product line
- Your costs change
- You decide to enter a new market
- Economic inflation or recession
- Your sales strategy changes
- Your customers are making more money because of the value you are providing
There will be occasions therefore when you need to change your prices but you should always analyse the impact on your profitability of any proposed change, i.e. what effect will the price change have on volume of sales or profit per sale?
If you are increasing your prices, always explain to your customers why this is necessary. Indeed, a price increase could be an opportunity to re-emphasise the benefits you offer and strengthen your relationship with your customer. Charge a fair price and your customers will be happy.
Never take the decision to lower prices lightly. Low prices often go hand-in-hand with poor-quality - is this the image you want to cultivate for your business? Business consultant Laura Willett believes that “consumers want to feel that they are getting their “money’s worth” and most are unwilling to purchase from a seller they believe to have less value.” Concentrate on building profits rather than cutting prices. In most circumstances, your customers decide to buy from you because of the benefits you offer; it is rare for the decision to be made based solely on price.
BlackCurve software helps you build additional rules into your pricing strategy, such as changing price based on your sales history, or using website performance data to give you an additional edge.
If your pricing strategy is currently failing, consider the ideas mentioned above to see where things could be improved. How you set the price of your products could be the difference between business success or failure.