03/03/2010

By Jonathan Jay, Founder, National Association of Business Owners and SuccessTrack

Pricing is a key marketing tool at whatever stage of business you are in — whether you’re just starting out, or an already established business. Be aware of the worth of your product or service before you even begin to think about pricing (or changing your pricing).

What you can charge depends on what your customers are willing to pay which in turn depends on what they think — or are persuaded to think — your product is worth. Your customers will consider your product or service to be more valuable if it solves a problem for them (which then saves them money, hassle, or time); if it adds real value to their bottom line; if they believe it to be rare or in short supply; if your company has a proven track record; if your company offers something that none of the competition can provide; and if the product or service comes with a strong 100% no-quibbles guarantee.

Price is a key factor in people’s perception of your product or service’s value. Many consumers equate value and price as being equal. For that reason, if you set your prices lower than your competition, consumers may perceive your product or service as being somehow inferior.

Undercharge for your product or service and you’ll end up sweating for peanuts… working extra hard for very little return. You’ll have less time and obviously less money to devote to developing and improving your business. Over-charge for your product or service and you may just price yourself out of your market (losing business to your competitors).

Consider the value of your product or service to your potential client. Estimate the impact it will have on their bottom line. Consider the market conditions in your industry. Find out what your competitors charge and what they actually provide. Work out the cost of producing or providing each product or service. Find out what consumers in the market want or expect and what they think about the product or service they receive. Is there a gap between their expectations and the actual product or service they currently receive? Can your product or service fill that gap? What will that mean in terms of your pricing structure?

Factors To Consider

Positioning

The price you set for your product or service must be consistent with your market position. How are you going to position your product or service in your market? Will pricing be a fundamental part of that positioning? If you are aiming at the budget end of the market, price will obviously be a major factor. If you are aiming at the quality high end of the market, then a low price could damage the perception of your product or service.

Demand

Consider the impact your price may have on demand for your product or service. Research your market: determine what percentage of customers would buy your product or service at a range of prices.

Cost

Calculate the cost of selling your product or service. Your price, fee or rate must have a profitability factor built in — your gross margin (price minus the cost of your product or service) must more than cover your fixed costs (rent, salaries etc) for you to make a profit.

Competition

What action might your competitors take in response to your prices? Be wary of triggering a price war.

Your Objectives

Decide what you want to achieve with your pricing and the long-term impact it will have on your position and profits: is it short-term revenue maximisation (to boost cash-flow), to maximise quantity (to increase market penetration), maximise profit margin, differentiation, or survival?

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