Setting the correct pricing strategy for your products and services is a great challenge. Pricing has a tremendous impact on your profits because pricing not only determines the quantity of product sold, but also the direct contribution to a store’s bottom line.
Here are a few key points to consider when setting prices.
Do your homework
Start by setting profit-margin goals. What is your target profit margin, taking into account your expenses?
To calculate this, 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, for example, and consider how these 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 also. Attempt to determine their profit margin – many retail 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.
Next, determine if you are competing on price or quality. It’s unlikely that you can compete in both areas, as quality usually suffers when prices are lowered.
If you position your business to be a low-cost leader then efficiency in your operations is critical. On the other hand, if you are selling quality then you should not compromise on price. Discounts are a good strategy only if you are trying to become a low-cost leader; they devalue your image if you are selling quality.
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. Most importantly, do not wing it! Any pricing decision should not be based on intuition. Instead, ensure that you use smart analytical tools to set proper pricing.
Maximise profits
Any price structure should be set so that profits are maximised based on the given demand relative to the price. It is not uncommon for prices to be too low, given demand, and this is a grave error that results in lower profits.
On the other hand, if prices are too high, not enough units may be sold as buyers decide to shop elsewhere. That’s why knowing demand is so important.
Does your pricing structure maximise or impede your sales revenues? Find the happy medium to maximise your sales and, subsequently, your profits.
You can 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 significantly and do what you do better than your competition.
If you are the best at what you do, price then becomes less of an issue in the short term.
Price to meet customer needs
Try to get feedback from customers about your pricing. Customers are looking for fairness and most realise that they get what they pay for, despite what they may say about wanting lower prices.
The most important benefit to them is to pay a fair price that seems equal to the value of the product or service. Of course the value of the product is relative and may differ from one consumer to another.
Competition, excess inventory and the Internet are driving prices lower than ever. Keep this in mind when setting any pricing strategy. All retailers have been forced to do more with less in the current landscape.
To do this, retailers must compete smarter, focusing on high levels of customer service and staff with strong product and market knowledge.
Most importantly, those in sales must believe 100 percent in the pricing of their products and services. Any doubt in this area will lead to customer objections on price and the loss of sales.
This is because customers will sense your lack of confidence. Competition keeps pricing fair, so have confidence in your pricing strategy and communicate that assurance to your customers.
In the end, any price should equal the value that a business delivers to customers via its products and services, so follow these guidelines and watch your profits improve.