Getting your pricing right will make an enormous difference to your turnover and your profits. But it’s a difficult art – set it too high and your customers will flock to cheaper competitors; set it too low and people will assume your product or service is low quality and steer clear.
In most markets, competitors’ prices will tell you what you can or should be charging. Assessing how your product or service compares to theirs – and the value your target customers put on the different features and benefits you offer – will also give you a good idea of what your own offer should be worth.
Setting your prices near to those of your competitors is a safe strategy because potential customers won’t rule your products out immediately for being too expensive. You’ll also avoid the risk of starting a price war by undercutting rivals.
If you have a grip on your market prices, it’s tempting to set yours just a little lower to give yourself a competitive edge. In fact, setting a slightly higher price is often a better pricing strategy.
In the minds of many customers, a higher price suggests better quality and any reduction in turnover caused by high prices can be more than offset by larger profit margins. If it doesn’t work, you can always reduce your prices to a more competitive level.
“Premium” pricing like this can be effective where there are barriers to competition – if you have a patent on your product or a loyal customer base, for example. It can be the best approach for smaller businesses, too. With higher unit costs, smaller firms can’t afford to compete on price alone and need to focus on adding value – through excellent customer service, for example.
Discount pricing strategies
Setting your prices lower might squeeze your margins, but it can be a good way to seize market share,particularly if you’re offering a new product or service. You’ll be sacrificing short-term profits, but you’ll also be discouraging competitors from entering your market. As your volumes grow, your unit costs will fall and you’ll have a lasting cost advantage over new firms trying to grab your share of the market.
If you’re a larger firm, you can use your cost advantages to follow a low price strategy in your established markets. This works particularly well if you’re selling commodity products with little opportunity for product differentiation.
You can also use discounted prices to encourage advanced bookings or sell off perishable stock at the last minute.
Pricing a range of products
The chances are that you sell a range of products or services. When pricing these, you should aim for consistency, so your customers feel there is value across your whole range. For example, restaurants often apply similar mark-ups across the menu, with minor adjustments to reflect the perceived value of individual items.
But you might be planning to position different products as up- or down-market, as many supermarkets do. You might even follow a “good, better, best” pricing strategy (such as you find with silver, gold and platinum credit cards). In either case, you will be able to target different market segments with different requirements and price sensitivity.
Finally, you might aim to capture customers with low initial prices and then profit from continuing purchases once your relationship has been established. IT companies, for example, aim to simply break even on the sale of hardware or software, but profit from maintenance and support contracts. This sort of pricing strategy can deliver a consistent revenue stream as well as significant profits.