Reviewing your pricing strategy
Key points in this article
- Deciding on a pricing model
- Pricing for market position
- Other pricing strategies to think about
While there's no such thing as the perfect price, there's often room for improvement. Here are some key points to consider when reviewing your pricing strategy.
Cost-plus pricing – add margin to costs to reach a price
Start with accurate figures for all the costs involved in making your products. As well as your raw materials, analyse overheads like staffing and premises.
Checking with your accountant can help ensure you haven’t missed any hidden costs.
Next, think about profit. How much would make the venture worthwhile for you? Think about the salary you could earn at another company, plus the return you could generate investing your capital elsewhere – the long-term aim is at least to beat that.
Value-based pricing – approach from the customer's perspective
With this approach, you price your product to reflect its value to your customer rather than the cost of making it. For value-based pricing, you need to understand your market, customers and competitors – it’s the only way to accurately reflect the perceived value of your product in the price.
Decide whether you want a value-based or cost-plus pricing model
Analysing the market
The trick is to strike a balance between optimising profit and using your price to position your product in the market. Through your research, your aim is to confidently answer:
- How much do other companies charge for products similar to yours?
- What’s the market’s tolerance for pricing on your product – how low or high can you go?
- How do you want to position yourself in the market – what sort of price does that equate to?
Price can help you position your product and business within the marketplace
Additional pricing strategies
Discounts can help move old stock and attract new buyers, some of whom may turn into longer-term customers. Be really clear about the terms of the discount – there may be legal as well as financial implications if you don't spell things out.
Some companies price a few key products below cost to draw in new customers, who will then buy additional profit-generating products too.
This is used in very competitive sectors where businesses need to build brand loyalty, so they sacrifice profit on those products to develop their share of customers. For instance, supermarket chains often adopt this strategy with staples like bread and milk.
A good way to increase the amount each customer spends is by offering multiple deals like ‘three for two’. This can help to shift stock – customers who would have only bought one, or perhaps not even have bothered at all, will now leave with three because of clever pricing.
Consider discounting, loss leader products and other pricing strategies
Communicating and reviewing your pricing
A crucial step in your pricing strategy – and one that’s often neglected – is carefully planning how you’ll communicate any pricing changes. Customers are more accepting of price rises if they’ve been explained clearly. They also won’t feel like they’ve been ‘caught out’ if they’re told in advance.
Reviewing your strategy
Review your pricing strategy often, as market conditions will keep changing around you. Regular small rises can be better than one large jump – which can easily lose you customers – so don’t leave too long between pricing reviews.