Credit to: Rosemary Carlson, Elizabeth Wasserman
Well, hello and welcome back to the final lap of our insightful blog! I must say, it has been an interesting and very informative twelve weeks and every bit of engagement is highly appreciated. For all our first-time readers, do yourself a favor and refer back to the previous articles to better understand the subject we are embarking on today.
Pricing, as used in business, is the act of establishing a value for a product or service. It refers to the decision-making process that goes into establishing a value for a product or service. There are many different strategies that a business can use when setting prices, but they are all a form of pricing. The final figure decided upon during the pricing process is what the customer will pay for a product or service.
5 common pricing strategies
Pricing a product is one of the most important aspects of your marketing strategy. Generally, pricing strategies include the following five strategies.
- Cost-plus pricing-simply calculating your costs and adding a mark-up.
- Competitive pricing-setting a price based on what the competition charges.
- Value-based pricing-setting a price based on how much the customer believes what you’re selling is worth.
- Price skimming-setting a high price and lowering it as the market evolves.
- Penetration pricing-setting a low price to enter a competitive market and raising it later.
The assumption is that you ventured into business selling services to customers to make a profit. If you were giving away your services for less than cost, or just breaking even, you’d be operating a non-profit venture or a business that’s likely to fail. There are a variety of components that factor into whether or not a business is profitable, including location, leadership, market demand, competition, etc. But one of the most important decisions you need to make to determine whether you turn a profit or not is how to price your services.
Ask yourself how you can arrive at a value-based price?
- Pick a product that is comparable to yours and find out what the customer pays for it.
- Find all of the ways that your product is different from the comparable product.
- Place a financial value on all of these differences, add everything that is positive about your product and subtract any negatives to come up with a potential price.
- Make sure the value to the customer is higher than your costs.
- Demonstrate to customers why the price will be acceptable, which includes talking to them.
- If there is an established market, the current price range will help educate you about the customers price expectations.
3 ways value-based pricing can provide an advantage
In value-based pricing, the perceived value to the customer is primarily based on how well it’s suited to the needs and wants of each customer.
- The price is a better fit with the customers perspective.
- Value-based pricing allows you to be more profitable, meaning you can acquire more resources and grow your business.
- When a price doesn’t work, the answer isn’t just to lower it but to determine how it can better match customer value. That may mean adapting the product to better suit the market.
Factors to consider in pricing
When pricing services, there is a bit more leeway than pricing products. Here are the factors that experts say you should consider when trying to determine what price to charge for a service:
- Cost-plus pricing. This standard method of pricing in business seeks to first determine the cost of making a product or, in this case, providing a service, and then add an additional amount to represent the desired profit. To determine the cost, you need to figure out direct costs, indirect costs, and fixed costs. Those costs include a portion of your rent, utilities, administrative costs, and other general overhead costs.
- Competitors’ pricing. You need to be aware of what competitors are charging for similar services in the marketplace. This information could come from competitor websites, phone calls, talking to friends and associates who have used a competitor’s services, published data, etc. If you have to compete on price to win a customer, you may ask yourself whether that customer will be loyal to you if they find someone offering a service at a lower price. You want to establish long-term relationships in the marketplace. You need to convince the customer that you are giving them tremendous value in terms of service and quality.
- Perceived value to the customer. When you have a product, you may decide to use keystone pricing, which generally takes the wholesale cost and doubles it to come up with a price to charge and account for your profit. With a service, you can’t necessarily do that. To your customer, the important factor in determining how much they are willing to pay for a service may not be how much time you spent providing the service, but ultimately what the perceived value of that service and your expertise is to them, and that is where pricing becomes more of an art form.
When you are considering your price, you realize it is not for yourself, but your target customers.? All pricing strategies are two-edged swords. What attracts some customers will turn off others. You cannot be all things to all people. But, remember you want the customer to buy your product, which is why you must use a strategy that’s appropriate to your target market.
Miss Victoria Marumo is a journalist with a distinctive and creative voice. Her avid reading complements well with her writing in providing captivating information on business topics.Writer: Victoria Marumo