Pricing your products and services can be tough. With shifting buying patterns affecting the way consumers purchase products, fewer things can have a bigger impact on your business’ bottom line than your retail pricing strategies.
During the last twelve to eighteen months, businesses have reported growing shipping costs and inflationary prices are eating into profits. As a result, they are feeling the pressure to either raise prices or eliminate all discounts. This leaves decision makers in limbo: afraid to set prices too high for fear they’ll miss out on valuable sales; or afraid to set them too low, and potentially miss out on valuable revenue.
Fortunately, pricing doesn’t have to be a sacrifice or gamble. We’ve created this guide to help you properly price your products and services so you can drive both revenue and profit.
A pricing strategy is a method used to establish the best price for a product or service. It helps you choose prices to maximize profits and shareholder value while considering customer and market demand.
Pricing strategies and pricing models are a bit different. A pricing strategy is internal to your business, whereas a pricing model is external.
A pricing strategy is the way you set your price.
A pricing model is the way you format your price or the way you package and present your goods and services.
If only pricing was as simple as a definition – there’s a lot that goes into the process. The right price is a matter of balance. If you price your product too high, your customer won’t buy it, or they will find an alternative source through your competition. If you price it too low, your margins will suffer, and your investors will be dissatisfied.
Deciding how much to charge and how to structure your pricing is a big decision; it requires appropriate consideration and research. To determine the right price, it’s critical to understand the following:
Be clear on your costs of goods sold (COGS): The dollar amount you spend to get your product or service to market. Before you think about price, you need a clear understanding of all of the costs of your goods or services. Make sure you include every element of product development, which includes, but is not limited to, manufacturing costs, materials, labor expenses, freight costs, and wastage.
Based on the price, ensure there is a margin (profit margin) which is part of the price you have left over once the costs have been taken out. To get the margin based selling price – divide the cost by the resultant gross margin percent to determine the selling price. For example, if the company expects to make a 30% margin on a $100 cost, then $100/70% (100%-30%) equals $142.85. This, by comparison, equates to 42.85% markup on cost.
At a minimum, ensure you are at break-even.
Markup is what you add on to the cost of your products and services to arrive at the selling price. It’s often set using a percentage formula. For example, cost plus a percentage; per the example above: $100 cost + 42.85% M/U equals $142.85 selling price.
Carry out competitor analysis to learn what comparable businesses are charging in your market. Evaluate current prices; explore historical price patterns; research if your competitors have employed techniques like penetration pricing or loss leading in the past (as these are used to buy market share).
You’ll have to decide between two main choices when you see the price difference between your same product or service:
You want to create a price point that is optimal for your unique business. It’s crucial to know your target audience’s price sensitivity and what they are willing to spend. Some factors that can affect this include:
Not every pricing strategy is applicable to every business.
Unlike digital or software products and services, physical products incur hard costs that influence pricing.
Business services don’t have a direct production cost and their value comes primarily from the provider’s ability to deliver and the quality of their work.
Education encompasses a wide range of costs that are important to consider depending on the level of education, type of institute (private vs. public), and programs offered.
The manufacturing industry is quite complex as there are a number of moving parts and your manufacturing pricing model is no different. This is also one of the more competitive industries, where innovation and efficiency are often the only critical differentiators. Manufacturing companies, especially, need to capture the best economic value of all their product lines to be a leader.
Pricing is often an underutilized strategy. However, when done correctly, it can create opportunities for new profits; or conversely, it can generate challenges for overpriced goods and services.
The following pricing strategies are straightforward to implement and can start producing profits almost immediately, as well as help determine loss leaders, specifically in the manufacturing segment:
In markets where there is little or no competition, companies can employ a pricing strategy that fully maximizes profits, based on the top price the market will pay for a product.
The positive, in this instance, is the company can realize the highest profits possible in the shortest amount of time. The negative, is that higher prices and profits could entice additional competitors to enter the market.
In good times, companies may focus less on identifying areas that are underperforming because rising tides in profits tend to cover their losses. However, it becomes even more important in a down economy to identify underperformers so you can understand why certain customers or certain product lines might be costing your company money.
The goal for the manufacturer, for example, is to set an appropriate price for the sales teams to quote and close deals. Having effective software driven business intelligence enables manufacturers to automate and accurately define that process of good pricing. The more accurate information your sales team has available, the better it will help when negotiating contracts.
With an optimized sales pricing strategy, excessive discounting and pricing manipulation can be eliminated, leading to more targeted profitability.
A proper pricing model will boost customer satisfaction and improve efficiency, speeding up contract and order closing. This can help identify customers that purchase multiple products across different product segments. Your sales team will have the advantage of being able to create a “package deal”, a one-stop shop for customers, allowing you to increase and enhance customer and market penetration.
Pricing is the one area of business where companies often assume all their customers are identical. Develop a pricing strategy that embraces customers’ pricing needs, such as product preferences and alternatives, product value to customers, and competitive landscape.
How you make money is determined by your marketing and sales strategy. The following business goals should be considered in determining the basis for pricing:
This step ensures that your pricing strategy considers the environment of the market in which your product or service will compete. Low-cost providers often market to a broad audience, while high-cost providers market to a specific audience.
If your market and product are broader, with many players who offer similar products or services, chances are you will compete on price. You will need to do everything to keep operational costs down to ensure maximum profit margins.
Conversely, if you have a high value, highly differentiated product or service, your offering may be more conducive to premium pricing, which lends itself to a different form of targeted marketing.
This step enables you to answer why, what, and how customers will use your product or service based on their specific and immediate needs. Recognize the perceived and real value your product or service brings to the customer. In such a value-based assessment, low-cost promotions and discounts will confuse your customers, undercut your value, and shrink your profit margin.
The pricing model and price point of your competitors should play a significant part of your pricing strategy.
Identify your major direct competitors and understand the structure of their pricing. For example, do they have component pricing; do they allow heavy discounts; are they bundling with other products or solutions? These are all important questions to answer.
Consider your value or benefit, along with the same or similar pricing structure, and make that a selling point. Just be careful not to meet competitive pricing that will negatively impact your bottom line.
As you can see, there’s a lot that goes into pricing strategy. It can feel like an endless list – production costs, customer demand, competitors, industry needs, profit margins. Fortunately, you don’t have to master all of these at once.
Start off by calculating some numbers (for example, your COGS and profit goals) and then figure out what’s most important for your business. Start with what you need and this will help you narrow down the pricing strategy to use.
Keep in mind, pricing strategy is a process. One that takes lots of research and, oftentimes, trial and error. You may not get it right the first time and that’s okay.
Contributed by Trevor Erridge & Jeana Andersen
Jeana has been in the software industry for 15+ years specializing in ERP reporting solutions. She has decades of experience in creative content development and marketing and enjoys exercising, traveling & spending time with her husband & twin boys.
Download Spreadsheets-The Corporate Secret Killer & What to Do About It to better understand its inherent errors, how to manage quality control & overconfidence, with detailed solutions on improving spreadsheets in financial reporting.
THOUGHT LEADERSHIP WHITEPAPER
We want to provide you with an update on the Log4J vulnerability that was identified this weekend as it relates to your Synoptix installation. The short answer is that there should be no vulnerability issues with Synoptix. Synoptix no longer uses Log4J. Version 7 did use version 1.2 of Log4J (which was not vulnerable), and should therefore also be clear of any vulnerability issues related to Log4J version 2.0-2.14 (which was identified this weekend as having vulnerability).