If pricing your products feels like consulting the Ouija board, you’re not alone. Many small business owners face this problem. As Entrepreneur noted, the price of products or services impacts not just profit margins, but also cash flow and hiring practices. With so many variables to consider for a pricing strategy, it’s critical to get it right. These five steps can help you understand how to price your product:
1. Understand Your Customers
You need to get inside your customers’ minds and answer these questions:
- Why would they buy your products instead of the competition’s? The reasons should be clear so you can make them the focus of your marketing campaigns.
- What do they like about your products? What don’t they like?
- What are their complaints? It may hurt to hear them, but complaints are excellent for improving product features and customer service.
To find the answers, conduct surveys, hold focus groups or simply ask for customers’ opinions. You should also read customers’ comments on your website. If you identify the features that customers are willing to pay more for, you’ll be able to charge higher prices that increase profits.
2. Analyze Your Competitors
Look at the competition and study their techniques:
- What are they doing right or wrong?
- Which themes and content seem to work in their sales copy, brochures and marketing?
- What pricing strategy are they using? Are they charging premium prices or offering discounts? How much?
- Which product features are they highlighting?
- Do they frequently run promotions? What calls to action are they using?
By studying the competition, you can better target your marketing programs and learn how to price your product appropriately.
3. Choose a Pricing Strategy
After analyzing your customers and competition, you can develop a pricing strategy. Here are several strategies for setting product prices.
With this strategy, everyone sells at the same price and competes by employing more aggressive sales and marketing tactics, faster delivery or a more liberal returns policy.
Competitors use discounts to gain market share with the lowest price. They make less profit on each sale but hope to sell more units to make up the difference. You could gain a competitive advantage by also lowering operational costs. Try negotiating lower prices with your suppliers, for instance.
This pricing strategy involves charging a higher price, but you’ll need to prove value to support it, perhaps by offering a better quality product. This strategy usually requires you to spend more on marketing to convince consumers why a higher price is justified.
To set the selling price with this method, you’ll start with the product’s cost and then mark it up by a percentage. For example, if a product costs $40 and is marked up by 50%, the selling price would be $60. Manufacturers and wholesalers use this technique because of its simplicity, customers believe it is fair, and it produces stable profits.
Retailers like this pricing strategy. The selling price is double its cost. A product costing $35 will retail for $70. Keystone pricing lets retailers earn enough gross profit to pay their overhead costs, cover losses from price markdowns, and make a profit.
4. Know Your Costs to Make a Profit
Calculate the break-even sales volume required to cover costs and make a profit. Costs include not only the variable costs of product materials and manufacturing labor but also fixed expenses, such as rent and wages. Break-even calculations can also help you determine how to set prices for your small business — which pricing strategy will help you reach your targeted profit?
5. Set Up Revenue Goals
From the break-even calculations, create a sales and marketing budget to produce your intended sales and profit levels. Don’t forget to factor in the amount of money and time needed to meet these goals.
Learning how to set prices for your small business is no small feat, but this five-step method will help to take the mystery out of it.