by Stacey Marone
One of the greatest challenges for a new businessman is to set the right price for the products/services they sell. They are either going too low with the hope to attract more customers with an affordable offer, or they set the same price the competition offers without paying attention to the value they provide and the expenses linked to the business.
The maintenance of a successful business is determined by your ability to set proper prices for your products or services. The price should provide enough profit for the organization to cover all expenses, but it should also be a sum the target audience is willing to pay.
There are different strategies that business people use when setting the prices. There’s no universal formula we can provide, but there are certain tips you can follow when you’re trying to express the value of your offer through prices. Let’s dig deeper into the problem.
1) Check the competition
This should not be the only factor that sets your price. A popular cake shop, for example, has many employees and purchases a great volume of supplies at discount prices. Due to the high number of sales, they are able to work with lower profits on a single cake, so they offer a lower price. If you start a small cake shop and you’re the only employee, you won’t be able to work for that price, so you’ll have to offer different recipes and attract the audience not with the price, but with the quality.
However, that doesn’t mean you should be completely unaware of the prices the competition has set. Shoppers often use price comparison tools (such as PriceGrabber and PriceBlink) to get the best deal on the market. You can use the same tools to research the competition and get a general idea of how much your type of product or service costs. Then, you can calculate the expenses related to production, and you’ll set a price that’s close to the average offer, but still leads to enough profits for your business.
2) Remember the main purpose: making money
Why is there a need for a pricing strategy at the first place? Why can’t you just set the price your intuition tells you is right? – Because the main purpose of running a business is making money. Even if you’re starting a company not for the money, but for the pure satisfaction of providing value for the community, profit is the main factor that will make it grow.
The essays scholaradvisor writing service, for example, has to set a price that’s enough to cover the expenses for business and website maintenance, as well as the payments for the writers. However, it also needs to make some profit that will enable it to research the market, expand its offer, hire a greater number of writers, and beat the competition with a great marketing campaign.
There are two main mistakes when inexperienced business owners form the price:
When the price of your product or service is unreasonable for the quality the customers get, it will simply drive them away. You cannot sell satin with the price of pure silk. There is a simple trick to avoid the detrimental problem of overpricing.
Ask yourself: how much would you pay for the service/product you offer if you were a customer? Be honest with the answer. Have you noticed some items on the market that were overpriced? What was your opinion of those businesses? “These people are crazy and their customers are crazy, too.” You probably thought of something like that, and you don’t want your audience to have such an opinion.
Thus, it’s important to offer a reasonable price that the customer is willing to pay. If, for example, you see that the top-quality brands sell organic cotton t-shirts for $20, you shouldn’t go much higher than that. Calculate the expenses you have for producing a single item. If you notice that the price that’s usual for the competition is too low to provide profit, then you need to cut some expenses. For example, you can learn how to use accounting software instead of paying an accountant, or you can be the only person responsible of marketing during the beginnings.
- Under pricing
This is a huge problem for new businesses. You might think that in a declining economy, low prices are the only way to sell. In a recession, setting fair prices for your products is even more important, since your expenses for supplies and bills will be higher. Instead of trying to convince your customers that you offer the lowest prices on the market, you should prove that you’re offering the highest quality, which provides the greatest value for their money.
Never reduce the prices to a point where you’re actually giving away your products/services for free. It’s important to craft a budget before you start producing. If possible, hire an expert to help you include every possible cost of supplies, production, maintenance, and marketing. Then, set a price that allows you to cover all expenses and gain some profit at the same time.
3) Evaluate availability
The tourism industry is known for its constantly evolving prices. You can have the most luxurious vacation for an affordable amount of money if you opt for off-season, but you’ll pay a crazy amount for tickets and accommodation for humbler destinations if you scheduled your vacation at the peak of the season. Customers are aware of these fluctuations in the prices and they accept them as normal. That allows agencies to sell their expensive offers quickly, and then sell the remaining places to last-minute travelers for a lower price.
There’s a lot you can learn from the tourism industry: the only way to sell when the demand is low is by lowering the price. If, for example, you’re maintaining a clothing business, the bargain prices at the end of the season will help you get rid of the stock and make room for the clothes of the new collection. When the demand is high and you cannot meet the requirements of all customers, you have to increase the price.
4) Keep your business goals in mind
When you were crafting a business plan, you had specific goals regarding your organization’s growth. The price you set is closely related to the realization of those goals. What revenue target did you set for the first year?
If you offer a single product or service, it will be easy to go through this estimation process: you will divide the revenue target with the number of items you expect to sell over one year. Don’t worry; the math is still simple even if you offer multiple products or services: you’ll just need to estimate a revenue target for each product, and the addition of all individual targets should form the overall revenue target you set in the business plan. Then, you’ll do the same calculation for each product.
The Price Is a Flexible Category
The conditions on the market are fluctuating, so you’ll need to change the price in accordance with the cost of supplies, electricity bills, transportation, marketing, and everything else related to your business. The way the audience accepts your products is another important factor that determines the price. Sometimes you’ll need to offer discounts in order to engage the target customers, and you’ll need to increase the price if the demand is too high for your organization to meet.
The important thing to keep in mind is that the price makes a difference both for you and your customers. You have to think about it all the time and adjust it in accordance with the current conditions on the market.
About the Author:
Stacey Marone is a freelance writer for Scholar Advisor and a social media marketer. She creates magnetic content optimized for search. In her free time, she also does volunteer work and organizes some activities for children. Her passions involve painting, reading, and singing. You can follow her on twitter
Latest posts by Nick Rakhshani (see all)
- How to make 1$ Million in 12 Months - April 12, 2017
- 5 Fatal Email Prospecting Mistakes You Want to Avoid - March 12, 2017
- Entrepreneurship is not just about big ideas - October 15, 2016