If you want to make a profit in business - and who doesn’t? That’s the point of having a business in the first place - then you’ll need to make sure you get your pricing right. Too low and you won’t make any money (and you might come across as suspicious, or at least low quality), and too high and you’ll lose out to lower-priced competitors. That’s why it’s so important to get things right from the start and invest some time in getting your pricing strategy just right. That can be a tricky thing to do, but if you want to know how to get started and what you need to think about, keep reading because we’ve got some useful tips for you.
Photo by Breakingpic
Understand Your Costs
One thing that’s really important when you want to get your pricing right and know what to charge is to know what you’re spending - if you don’t, you run the risk of charging less than you’re paying out, which is a disaster.
It does depend on the kind of business you’re running, as there will be different expenses for each sector, but in general, you’ll have to think about how much you’re paying for the goods or materials you’re buying, as well as all the costs associated with your business, like salaries, rent, insurance, vehicles, and so on. You might also need to use a tool to help with calculating the cost of labor, especially if you’re in the service or construction industry, for example. Once you’ve got the total cost, you can work out how much you need to charge to cover it all, plus make a profit.
Research The Market
When you’ve got your costs in place, you can’t just pick a price that’s higher and hope for the best, as tempting as that might be. Instead, you’ll have to conduct some thorough market research to see what your competitors are charging and, if you can, to find out what your ideal customers would be happy to pay for whatever it is you’re providing. If you miss this step out, you’ll have problems because, as we mentioned above, you might be too high or too low in your pricing, and after that initial price has been seen, it’s hard to put things right again (although it’s easier to reduce prices than to put them up, which could be a useful thing to be aware of).
By using surveys or creating focus groups, you’ll get a good idea of what people want to spend, and you can take an average to give you an idea of the figure you should be working around. Although it might be easier just to ask friends and family, they’re not always too reliable - they’ll want to give you the answers they think you’re looking for rather than the ones that they really think, and although they’re being kind, it’s not all that helpful; strangers are a better bet.
Choose A Pricing Strategy
There’s a lot more to pricing than just choosing a price that’s higher than your costs and that aligns with your customers' preferences (although that does make up a large part of working it all out, we’ll admit). There are actually a few different pricing strategies you can use, depending on the outcome you want, and picking the right one is important.
You could, for example, choose cost-plus pricing, which means adding a markup to your costs to get your selling price. Or there’s value-based pricing, which means setting prices based on the value (or perceived value) of your goods and services. Or how about competitive pricing? That’s when you price your products based on what your competitors are charging. That could go hand in hand with penetration pricing, which is all about setting a low initial price to get into the market quickly before putting prices up at a later date. On the other hand, could skimming pricing work better for you? That’s when you start high and gradually lower your prices as time goes on.
It’s important to know which pricing strategy you’re going to use and stick with it, as trying to use too many at once causes confusion and messy pricing, which your customers won’t appreciate.
Monitor And Adjust
Although you might like to think it, pricing isn’t a one-time decision that you can do and then forget about as you enjoy the profits. In fact, there are a number of things that can happen that mean you need to change your pricing, including what your competitors are doing, how the economy is working, what your suppliers' prices are, and how many staff you have, for example.
As things change, you’ll need to adjust your prices to match up or run the risk of losing money, either because you’re no longer making a profit or because your competitors are charging less.
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