Key Business Skill: Finance – Pricing
Your pricing decisions, and your pricing strategy are one of the most important and influential areas for a profitable and successful business.
The first thing to ensure is that you cover your costs, or you will lose money. We have discussed costs previously, so you will know that it is important to be clear about what your true costs actually are.
Cost is one issue, but value is another thing altogether. So once you know what your base price is, you need to consider whether you are covering costs, with an allowance for profit, or selling for what you think the product will earn.
So these are the two basic methods of pricing your products and services, cost-plus and value-based pricing. The best choice for your product depends on your type of business, what influences your customers to buy and the nature and level of your competition.
If you price too low, you will be sacrificing profit. If you price too high, you will lose customers, unless you are offering them something they can’t get elsewhere.
If you have clearly-defined benefits, or a brand image that will “carry “ the price, you can use the advantage over your competitors to leverage a higher price.
This approach can prove very profitable, but will not attract the sector of the market who are driven only by price considerations.
Be aware that high profit margins will tend to draw new competitors into the market place.
Quick Facts: Finance – Pricing a product
Cost-plus pricing here you establish the cost of producing your product or service and add an amount that you need or want to make a profit. This can often be a percentage of the cost.
This type of costing is often used by businesses that sell large volumes or operate in markets dominated by competition on price, such as basic food items.
Cost-plus pricing does not take account of the value that your client places on your product, and it ignores your brand image and market positioning.
Hidden costs are easily forgotten, so your true profit per sale is often lower than you realise.
Value-based pricing focuses on the price you believe customers are willing to pay, and this will be based on a number of factors, and depend on the strength of the benefits and perceptions you offer to customers.
These will include;-
- the benefits your product or service offers them
- price competition in the market place
- competitive products in the market place
- Brand perception.
- Scarcity value