Pricing a product or service fairly is one of the biggest aspects that entrepreneurs face when running their business. Charging the right price enhances your sales and directly relates to your product’s positioning – which is why the pricing strategy is definitely not guesswork.
There are psychological aspects that strongly come into play when pricing your product. When it’s priced too cheaply, customers will view it as low in quality. If it’s priced expensively, chances are that customers will be put off and look elsewhere for a better-priced product. So how do you pair psychology with science and adopt the right pricing strategy? Below are some pointers to help you make the right decision.
First of all, what are your costs?
You need to figure out your break-even point. Find the total of your costs of materials, labor and overheads before adding on your desired profit on sales, which will bring you to the required sale price. This is called cost-plus pricing, which isn’t effective when used alone. By additionally implementing competitive-pricing, you can research what the established market value is for your product, and if your sale price is lower, you can comfortably increase your price to that market standard.
Check out the buying behavior of your target market
Who are your target customers? Take a close look at their demographic, their average income and the type of products that appeal to them whether they are budget, convenience or status focused. You’re then able to research into how much they are willing to pay for a similar product/service. The better you know your customers, the more effectively you can fulfill their needs – justifying an increase in your prices.
Measure your competitors’ prices to what they are offering
We’ve just mentioned how important it is to keep your customers close, but keep your competitors closer. Keep a sharp eye on your competitors’ products and how they price them. How will they influence your pricing strategy? Well, if you want to charge more or match them, ask yourself if your product/service has extra features, (or better features) that validate an increase in price? Are you offering a completely different concept of a particular service or do you feel your brand is stronger?
Or are you planning to appear more affordable? Be weary when undercutting competitors – having super low prices will affect the sustainability of your business. It’s harder to set them higher in the future since how will you convince customers of this major price increase?
When the market fluctuates – so must your price
Nothing is set in stone, especially not the market. Customers’ perceptions and needs may change, the economy isn’t always steady, competitors may alter their pricing and your costs may differ in the future. By staying in the know on market trends and listening closely to customer feedback, you are more prepared for these changes.
When to raise your prices and when to lower them
The best time to raise your price is when you pair it with an additional new and unique ‘bonus’ service for your customers, that will allow them to feel more excited about your product and justify their higher purchase. If you feel you need to lower your prices to attract more of your target market, try the alternative approach of offering discounts as an incentive for potential customers to ‘try’ your product – such as a free trial or a starter discount which gives them a good initial feeling associated with your service immediately. Once they’re in, you might have them for life.