Following on from our earlier blog on setting prices, once you have established how much your products cost you, you then need to decide on a pricing strategy.
- Cost-based pricing – this is where you simply add a profit margin on top of your break-even price.
- Value-based pricing – here you work out how much your product is worth to the customer.
Whichever you choose, take these key things into account:
The biggest thing that will affect your pricing strategy is your positioning strategy and the perceived quality of your products and services. If you product is being positioned as a premium, high quality product, you need to make sure the price reflects that. Customers expect price and value to go hand-in-hand, so if your price doesn’t represent the value you are providing, you could be driving customers away.
Customer perception of value
This is about how much your product is worth to the customer. It can be very difficult to set a figure on, and often impossible to work out exactly, as it depends on the alternatives available to the customer, which may not be calculable.
For example, the alternative to having an IT support contract is (a) another supplier (b) recruiting an in-house IT person (c) getting a technically-minded friend/colleague to step in when needed (d) muddling through praying your IT won’t fail you at a critical moment.
The opportunity cost of your computer crashing the night before a major presentation is incalculable, but if your customer understands the potential value of the solution, they will be prepared to pay for it.
The Sales vs Price Relationship
This is the premise that if you reduce the price, sales will go up and if you increase the price, they’ll go down. All businesses should consider how they might be able to maximise their profit (not turnover!) from a product based on assumptions regarding the relationship between the product’s price and the number of units sold at that price.
For example, a company might increase its profit by reducing prices if sales will increase exponentially as costs go down. Of course, positioning and the customer’s perception of value mean that a graph of sales volume against price is never a simple straight line, however there will always be a “sweet-spot” where profit is maximised.
Unfortunately, even with the best preparation and consideration, only time will tell you whether you’ve set your price right. At the end of the day, you can only set a figure and see how the market responds.
Ros Conkie is a KMS Marketing Consultant who has experience in helping companies maximise their profit. Contact us to find out how she can help you set your marketing strategy so it delivers the results your company wants.