Pricing your business’ products or services is a tricky business. You don’t want them to be too high because that will drive customers away. You don’t want them to be too low because that will leave money on the table. Like Goldilocks’ porridge, you want your prices to be just right.
Easier said than done, you say? Maybe, but let’s take a deeper look.
When looking to set the optimal price for the things you sell, there are three foundational factors to consider.
1. Your cost. With the exception of some rare circumstances determining the costs for you to buy something is where you must start when setting your prices. If you pay $10 to buy a widget, then that’s that. But don’t stop there. You must also factor in your overhead. Overhead includes factors such as:
Between the wholesale cost of the item and related overhead, you get your base cost.
2. Your brand. What you would pay for a VW is not the same as what you would pay for a Mercedes. Why? Because each company has a different brand, different quality and different pricing strategies.
The same is true for your business, brand and pricing. If it’s a high-end shop, then you need to charge high-end prices. If you are the “low-price leader,” needless to say, you need to have low, low prices.
The key factors to remember about both is that the luxury market allows you to charge more and make a greater profit per sale, but you will sell less. The lower price strategy allows you to penetrate the market more, sell more, but make less per sale. Both are equally valid, but the one you choose depends on your brand.
3. The competition: You must consider what the competition is doing. If they sell that widget for $15, you are going to need to be in that ballpark. This is especially true, today, when it is so easy to price compare online.
Remember this too: Price is just one factor that people consider when making their buying decisions. Sure, there are times when it is the most important thing, but not always. How often is price the main reason you bought something? Exactly. It’s important, but not always the deciding factor.
With that foundation in place, here are a few pricing strategies to consider:
The loss leader: The loss leader is a tried-and-true strategy that can be a great way to grow any business. It’s a simple concept. You offer a popular product at a steep discount, at a loss even. By offering this, you lead customers to your business, hence, “loss leader.”
The idea is that once they get to your store to buy the sale item, they will hopefully buy other products or services from you as well that are not marked down. When you see an ad for an amazing sale somewhere, that store is hoping to lure you into their shop with the discounted ad price, and then sell you something else.
Other than getting a sale, the loss leader strategy can also be also used for:
- Getting rid of unwanted merchandise: The loss leader can move old merchandise.
- Attracting new customers: People love sales.
- Building your brand: If you would like to be known as the “low-cost leader,” this strategy will help.
- Build repeat customers: As indicated, people like a bargain. If they find that you are offering one, then they will likely come back again.
The luxury price: At the other end of the spectrum, selling for more works great if that fits your brand. For example, Apple CEO Tim Cook told Bloomberg Businessweek in an interview, “We never had an objective to sell a low-cost phone.” The Apple strategy has long been:
- Offer a few high-end products
- Pursue high profit over broad market share
This type of strategy can work if you have some sort of competitive advantage in which people are willing to pay a premium.
Psychology pricing: Along similar lines, prices that end in odd numbers seem cheaper than those ending in whole numbers. A widget for $14.99 is different than a widget for $15.
When it comes to pricing, what works is often a matter of taking all the above into account, adding in some trial and error, and finding the sweet spot of price.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business Success.© Steven D. Strauss.
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