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Pricing Strategies

Pricing Strategies

What's the best way to establish a price for your products or services?

Getting your pricing right is crucial. Put your prices too high and your customers may desert you; put them too low and you’ll generate sales but won’t have a large enough profit margin to create healthy revenues and cashflow for the business.

Whether you’re a new startup, or an established business, choosing the right pricing strategy is a fundamental part of designing your business model. As such, pricing is something that’s likely to take considerable thought, research, planning and analysis over the lifetime of your products.

So, how do you know what to charge for each product and/or service? And how do you decide a price point that’s both competitive AND profitable for the business?

Costs, margins and hitting the right price point

For your business to be viable, you have to know for certain that you can:

  • Find and win customers
  • Meet your project sales and revenue targets
  • Cover your running costs, overheads and operating cashflow
  • Generate profits and get a return on your investment.

But how does this all come together to define your final sale price? The answer is to have a granular understanding of your costs, your margins and your pricing – and also to know who you’re selling your product/service to.

Different ways a price can be worked out

Cost price

When you make a product, or deliver a service, you need to spend money to do that. This expenditure includes the raw materials, the business overheads and the labour costs of creating your product/service.

By adding up all these expenses and dividing them by the number of units you delivered, you get your cost price. In other words, it’s the total cost of the unit before any margin or profit is added.

Wholesale price

Your margin is the amount you add on to your cost price to make a profit.

So, if my cost price per unit is $5, I might sell each unit to a wholesaler at $7.50. By doing this, I recover the cost of making the unit (or ‘Cost of Goods Sold’ in accounting terms), and I make a profit of $2.50 on each unit I sell to my wholesale client. This is the wholesale price.

The wholesaler will then add on their own margin in order to sell it to a consumer at. Using the example above, if the wholesaler sold each unit for $10. You make $2.50 and the wholesaler makes $2.50.

Retail price

This is the price when you sell the product to a consumer. The retail price factors in margins and comparing prices within the market to ensure you're competitive but still turning a good profit.

So, if you sell direct to a consumer, at a price of $10, and your cost price is $5, then you’ll make $5 profit for every unit you sell.

This contrasts with $2.50 profit per unit if you sell to a wholesaler, although you’re likely to sell in bulk to a wholesaler and will make your profits through this economy of scale.

Premium or economy pricing

Knowing how to position your product/service in the market is important.

Are you selling a premium product, with a high price tag? Or are you selling an economy product, with a low price point? There’s a big difference between selling a limited number of units at a high price (and high profit), and selling a big number of units at a cheap price (low profit but larger sales).

Positioning your prices between these two polar ends of the pricing spectrum isn’t easy, and will take time, experience and plenty of experimentation to get right.

Knowing when to discount or increase your prices

Your price isn’t a static thing.

Costs of production will increase, markets will change and sales campaigns will require discounted prices. So it’s vital to continually assess, review and update your prices.

For example, you could run a discount to increase sales, decreasing your margin and selling more units. Or you could choose to put your price up to increase your margin and make things more profitable.

What’s important here is to know how price-sensitive your customers are, how loyal they are to the brand, and what they’re willing to pay for your specific products/services.

Pricing is a complex and difficult area to get right, so working on your pricing is something that should be done on a regular basis.

If you’d like to review your current pricing strategy, please feel free to talk to us. 

How much should you charge

How much should you charge?

Getting your pricing right is one of the best ways to plan for business success. Don’t make a rushed decision, take the time to properly understand the market, your total costs, and how to position your products or services.

Figuring out how much to charge is a big learning curve for any business owner. The answer to how to approach it will fluctuate as circumstances and markets change. It is important to revisit the question throughout the lifecycle of your business.

There is no magic formula

All businesses are unique, with an individual offering of products and services. Before you set your pricing, It’s important to look at the whole picture. This will help to ensure you are being strategic and not just following trends.

Gather the data

To get started, you need to gather as much information as possible. Block out some time to sit down with your business data and strategies. Pricing is essentially figuring out where your products and services are positioned in the market. So keep your business strategies top of mind. It doesn’t have to be a confusing exercise. Just grab a coffee get started.

Here are the first steps to consider:

  • 1
    Record all the costs involved in production. Make sure you include indirect costs, such as assets, insurances, licenses and legal costs.
  • 2
    Now that you have your outlay, consider your current profit margin or what margin you require. Remember there is a difference between net and gross profit margins. Net margins take all operating costs into account
  • 3
    Do your competitor research. Be thorough in understanding the market and what others are charging for the same service or product or variations of this. What unique selling points (USPs) does your business have that allow you to vary your prices?
  • 4
    Think about your offerings. What extra benefits or offerings do you have that can affect your pricing? Think about cheap and no-frills on one end of the spectrum, versus high-end premium products. Can you create different products at different prices to cater to different segments of the market?

Don’t forget to check in on your pricing regularly to make sure you’re keeping up with your customers and staying ahead of the game.

Contact us if you need assistance