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Pricing Your Product - Developing a pricing strategy

Developing a pricing strategy

What will it cost to produce, advertise, sell & deliver?

When developing an overall pricing strategy, you will need to consider the following:

  • Understand what your goods or services cost you to provide, and what they are worth to your customers.
  • Work out your fixed and variable costs, and what you will need to charge to break even if you take both in to account.

Decide whether to use cost-plus or value-based pricing.

There are also other considerations when you are deciding what to charge for your products. It's important to find out what your competitors offer and what they charge. If you phone your rivals and ask them for a quote, checkout their website for prices, you can use this information as a guide.

It's probably unwise to set your prices too much higher or lower than your competitors without a good reason. If you price too low, you will just be throwing away profit. If you price too high, you will lose customers, unless you can offer them added value. Always consider how your prices compare to the overall market, and think about what you would look for as a customer.

The difference between cost and value

Knowing the difference between cost and value can increase profitability:

  • the cost of your product or service is the amount you spend to produce it
  • the price is your financial reward for providing the product or service
  • the value is what your customer believes the product or service is worth to them

For example, the cost for a plumber to fix a burst pipe at a customer's home may be £5 for travel, materials costing £2.50 and an hour's labour at £10. However, the value of the service to the customer - who may have water leaking all over their house - is far greater than the £17.50 cost, so the plumber may decide to charge a total of £50.

Pricing should be in line with the value of the benefits that your business provides for its customers, while also bearing in mind the prices your competitors charge.

To maximise your profitability, find out:

  • what benefits your customers gain from using your product or service
  • the criteria your customers use for buying decisions - for example, speed of delivery, convenience or reliability
  • what value your customers place on receiving the benefits you provide
  • wherever possible, set prices that reflect the value you provide - not just the cost.

The Different Pricing Tactics

Different tactics can help you attract more customers and maximise profits.

Discounting

Offering specially-reduced prices can be a powerful tool. This could be a clearance discount to sell old stock, a discount for making multiple purchases of the same or similar products, or you could offer bulk discounts to encourage larger orders. You should be able to make these more profitable through lower costs.

But be careful. If you discount too much, customers may question your full-rate pricing or see you as a cheap option, making it difficult to charge full-rate prices in the future.

Odd value pricing

Using the retailer's tactic of selling products for £9.99 instead of £10 can be useful if price is an essential part of customers' buying decisions. Some customers perceive odd value prices like this as being more attractive.

Loss leader

This involves selling a product at a low or even loss-making price. Although you may not make a profit selling this product, you could attract customers who will also buy other, more profitable products.

Skimming

If you have a unique product or service, you can sell it at a high price. This is known as skimming - but you need to be sure that what you are selling is unique. Otherwise you may just price yourself out of the market if there is credible competition.

Penetration

This is the opposite of skimming - starting at a low price and gaining market share before competitors catch up with you. Once you have a loyal customer base, you should be able to find ways to raise prices later