How to price your products appropriately for the market
Why is this important?
Choosing the right pricing strategy strengthens your chance of achieving turnover and profit in line with your objectives.
Pricing your products is part art and part science and there is no magic formula. Flexibility in setting the price can also create angst over whether it is right or not. And getting it right can be crucial to ensuring the success and growth of your business.
Getting the price wrong can create problems in a number of ways, such as:
- Whether too high or too low, it may generate incorrect perceptions on quality and/or value of your product, deterring your target customers and impacting sales
- If too low, you can lose money on the sales you do make because you haven’t properly covered your costs
What to do
1. Research your price position – this is key
Ensure you have covered the following before you set a price:
- Know the true cost of making and delivering your product
- Research current market prices – know who your competitors are, what they charge and how you compare on quality and service.
- Know who your target customers are, and what value they expect, and price accordingly.
- Be clear on what you are offering – are you a service provider or a discounter? You can’t be both.
- Consider your market positioning and competitive advantage. What is the demand for your product? Is there an over-supply, or an under-supply?
2. Set your pricing strategy and tactics
Determine your pricing strategy and the tactics you will employ to make it work. Strategies include:
- Market pricing – set this based on competitors pricing and compete on value added areas such as delivery or customer service
- Cost plus pricing – be careful that the cost used as the basis to mark-up is one that ensures you cover all overheads
- Loss leader – pricing a product at a loss to attract customers to a higher margin product
- Psychological pricing – price on prestige/brand or ‘odd even’ pricing (i.e. $99 v $100)
- Price matching
- Bundling – package or bundle products together into a one price deal
- Discounting – temporary or permanent promotions to clear obsolete or slow moving products
These strategies can be used in isolation or in combination.
3. Regularly monitor and adapt your prices
Monitor pricing and profitability, not just in holistic terms but by product – what is selling and what’s not, and at what prices? Which are making you money, or hitting your GP targets, and which aren’t?
Some of the triggers to review pricing of a product are:
- It’s not selling
- You’re introducing a new product
- Your costs change
- Competitors increase or decrease prices
- Competitors introduce a new product
- Changes to industry or economy
Test new prices on a regular basis but when changing prices make sure you analyse what the impact will be on sales volumes and profit.
While the temptation to cut prices can be difficult to ignore, particular in challenging environments, it can lead to undesirable results. Focus on marketing your strengths and price accordingly, even if means an increase in prices.
The following table shows how much you would need to increase your sales volume to maintain profit levels if you decrease prices. Using the highlighted field as an example, if you decrease your price by 10% at a margin of 30%, you will need to increase sales by 50% to maintain profit.
This second table shows the reduction in sales volume you can cope with and not drop profits when considering a price increase. Again, using the highlighted cell as an example, if you increase your price by 10% at a margin of 30%, your sales can drop by 25% before profit is affected.
Alternatives to price changes include:
- Loyalty programs
- Buy one get one free deals
At the most basic level pricing is simply research, set, monitor and repeat – but the reality is much more complex. The art of pricing takes practice – help is available across all stages should you need it.
For advice in relation to pricing, please contact any of our Business Advisory specialists around Australia.