Pricing your products is one of the cornerstone decisions you’ll make because it impacts almost every aspect of your business. Your pricing is a deciding factor in everything from your cash flow, to your profit margins, to which expenses you can afford to cover.
If you’re trying to find a price for your product, there is a relatively quick and straightforward way to set a starting price. Remember, just because it’s the price you use to launch doesn’t mean it’s the price you’ll use forever.
The most important element of your price is that it needs to sustain your business. If you price your products low, or at an unsustainable profit margin, you’re going to find it challenging to grow and scale-up your business.
1. Cost-plus pricing—simply calculate your production costs and add a profit mark-up
2. Competitive pricing—setting a price based on what the competitor charges
3. Value-based pricing—setting a price based on how much the customer believes what you’re selling is worth
4. Penetration pricing—setting a low price to enter a competitive market and increase the price later
Let’s analyze these strategies in detail.
1. Cost-plus pricing
This is the pricing strategy being used by many businesses, for instance, if you produce bead, and the total cost for the materials used in producing a bead is $100 you could add $20 profit to each product, then your bead will be priced for $120 with a 20% profit merging.
But before adding a profit margin its essential to write down your business goal, We are all in business to help people and make money in the process, you need to be clear about how much money you want to make yearly and the number of products you need to sell to help you achieve your financial goal. This will determine how much merging that will be added to your cost of production.
The amount of money you will make depends on your ability to sell and not necessarily the price.
2. Competitive pricing
This pricing strategy helps you blend with your competitors, but what happens if you provide more value than your competitors, then this pricing strategy might not be the best for you. Your price is a reflection of the value you provide, the higher you charge, the more benefits your buyers expect to get from your products.
3. Value-based pricing
Value-based pricing is a sure way to achieve your financial goals fast. When engaging in value-based pricing you must have a product or service that differentiates itself from the competition. The product must be customer-focused. This means that any improvements and added features should be based on the customer’s wants and needs. And the product or service must be of its highest quality.
The company must also have open communication channels and strong relationships with its customers. In doing so, companies can obtain feedback from their customers to help keep delivering value, based on the customer’s expectation.
4. Penetration pricing
Penetration pricing is a pricing strategy used by businesses to attract customers to a new product or service by offering a lower price during its initial offering. Penetration pricing helps a new product or service penetrate the market and attract customers away from competitors.
The goal of this pricing strategy is to entice customers to try a new product and build market share with the hope of keeping the new customers once prices rise back to normal levels.
This can often increase both market share and sales volume. Additionally, a higher amount of sales can lead to lower production costs and quick inventory turnover. However, the key to a successful campaign is keeping the newly-acquired customers.
For example, a company might advertise a buy-one-get-one-free campaign to attract customers to a product or service. Once a purchase has been made; ideally, a contact list is created to follow-up and offer additional products or services to the new customers at a later date.
If the low price is part of an introductory campaign, curiosity may prompt customers to choose the brand initially, but once the price begins to rise to the price level of the competing brand, the product value will be essential to retain and keep your new customers.
The best practice to achieve success with Penetration pricing is to offer great value to your customers and when you increase your price. They will stick with your brand because they are getting good value for their money.
The biggest mistake many businesses make is to believe that price alone drives sales. Your ability to sell is what drives sales.
“The first thing you have to understand is the that, the selling price is a function of your ability to sell and nothing else. What’s the difference between a $10,000 Rolex and a $50 Seiko watch? The Seiko is a better timepiece. It’s far more accurate”¦. But the difference is Rolex’s ability to identify high paying clients and be able to sell to them.”
The value you offer is your worth
Your branding and positioning in your industry determine how much you charge
And your ability to sell determines how much money you make.