Pricing your products can be tough yet it’s among the cornerstone decisions to make as a business owner. It has an impact on every aspect of your business. From your cash flow to profit margins, product positioning or expenses you want to cover. Setting it too high, you might miss on sales. Setting it too low, you miss out on revenue.
Businesses are now dealing with well informed customers who know how to get the best value for their money. Luckily, pricing is not like taking a shot in the dark. There are numerous pricing strategies and models to help you set the right price for your target audience and revenue goals.
With the various pricing models available today, it’s easy for small business owners to fall in a black hole. It's as much a science as it is an art. The relatively straightforward and quick way of setting the retail price is by adding up all costs involved in getting your product to the market, set your profit margin, and add it up. This is a Cost-Plus Pricing Strategy and it’s one of the simplest and most popular with small businesses.
Just FYI: The best pricing data a business owner can have is from testing with real customers. Pricing is not a decision you make only once in your business lifetime. Just because it’s the price you launched the products with, it’s not cast on stone forever.
Understand all the costs involved to get your product out in the market. Take note of the raw materials, labour costs, packaging, shipping, promotional costs, commissions and other overheads including the time you spend in your business. This gives you the cost of goods sold.
Now build up profit into your price. However, before you do, consider these two things.
Fixed costs: These are not part of your variable costs and you have to cover them when adding your profit margin. They are the costs you’d pay no matter what e.g. rent, utility bills, insurance, etc.
Overall market price:Put into consideration the overall market price range. Look at the consumer trends and competitors pricing. Continuously run price comparison to see how your product stacks up against similar products.
One of the critical factors to consider in pricing is that it sustains your business. You may lose your market share if you set it too high as some customers won’t purchase. On the other hand, if set too low you may have an unsustainable profit margin, making it difficult to grow and scale.
Your pricing has to match the buyer you’re looking for. Look at the customer lifetime value, willingness to pay, and their pain points. To get this right, get sales team feedback and interview customers and prospects.
Take a look at your sales, closed deals, the various pricing strategies used and see what works best for your product and business.
Ensure the price is not only good to your bottom line but also your buyer's persona. A balance will help your business and customer pool. You’ll be able to increase profitability, improve cash flow, market penetration, expand your market share and increase conversion.
We hope this will help you get your pricing right. Everything that goes into it might make your head spin but thankfully, you don’t have to get it all at once. It’s OK if it takes several tries and research as pricing is an iterative process.