Need to Know: Pricing

Need to Know: Pricing

     One of the most important aspects of a successful business is pricing your products or services properly. Correctly pricing your products is part science and part art. There are a variety of methods and strategies to successful pricing. The keys to pricing your product include: targeting your demographic properly, researching the competition, and understanding the relationship between cost, price, and value.

     The first step in determining your price is to examine your direct and variable costs for your business and each product or service. While you may not make a direct relationship between your costs and prices, generally called cost-plus pricing, it is a fundamental tenant to know what costs must be covered and factor it into pricing. Many businesses fall into the trap of underpricing or overpricing by depending on costs alone. By failing to account for all costs , they tend to underprice. By factoring in all their costs and expecting a profit with one product they tend to overcharge. A good rule of thumb is to make a spreadsheet of all the costs you need to cover every month which will give you a good idea of how much revenue you need to generate to cover your costs.

     It is essential for you to properly undertand your target market and demographic. (See here.) This can help you understand how your market is segmented and what certain demographics buy, for how much, and how sensitive they may be. Once you determined the market demographics, you can create a detailed pricing strategy to reach each segment. Some customer may be willing to pay more but need to be educated on the greater value they are receiving from your product. While other customers desire a lower price and willing to take a lower quality product. Know your demographic and target your market with sharpshooter accuracy.

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     It is also imperative that you research and understand your competition. You should understand their pricing method and compare your product or service. Identify who your competitors are, how their product is different, and whether customers know and care about those differences. If your customers cannot understand the value of your product versus a competitor, you should fix that before moving into aggressive pricing strategies. When your customers understand the value your product brings, they will be more price flexible. Price flexibility allows you to achieve and maintain greater margins on your products. Continue to research and track your competitors pricing and demographics in addition to your own. These can lead to understanding long term patters and cycles that may impact the future sales of your product.

     Lastly, an important factor in your pricing strategy is understanding the difference between cost, price, and value. The cost of your product is the amount you spend to produce it. The price of your product is the financial reward you receive for providing the product. The value of your product is what your customer believes the product is worth to them. Pricing needs to be in line with the value your product provides to your customers while also keeping your costs and competition in mind. Targeting your demographic and researching your competition allows you to understand the value of your product and price accordingly. Determining your costs allows you to set profitable margins while pricing accordingly.

     There are two main pricing strategies: Cost-Plus and Value Based. Cost plus pricing takes the cost of our product than adds an amount that you need to maintain a profit. This pricing strategy is suited more for businesses that deal with large volumes or in markets that are very price sensitive. This pricing strategy also does not rely much upon marketing and segmenting your demographics. This pricing strategy is also the easiest, so many start-ups chose cost-plus. This can be a devastating choice in the long term. Cost-plus pricing strategy is a strategy solely based on price, and generally ignores the value your product may bring to a customer. If your customer perceives your product as more valuable but you have chosen cost-plus pricing strategy, you may be giving up much of your margins to compete on price.

     Value based pricing focuses more on the value that your customer perceives and the price they are willing to pay. Value based pricing depends on the strength of your benefits your product provides. You need to have a clearly defined value (benefit) that gives you an advantage over your competitor. Allowing you to charge according to the value your customers receive. This strategy can be very profitable but can be expensive to develop and also alienate the segment of your market that is very price sensitive. Many industries and services have moved to a value based pricing strategy.

     Pricing is an important part of every business and should not be taken lightly. Remember that price alone does not drive sales. Your ability to sell drives sales, understand how pricing is a function of sales. Reidel Law Firm is designed to serve Texas small businesses from the ground up. We offer flat rate services to help Texas small businesses survive and thrive in today’s challenging market. Call today at (832) 510-3292 or use the form below to schedule your free consultation.