So, you are a small business considering how to price your product or service. What are your options?
You simply set your pricing to match that of your competitors, or slightly lower. If you consider price to be a key factor in achieving a sale, then you will be inclined to go with this option for fear that if you price higher, the sale will be lost to a competitor!
The issue with this option, is that there is no great science to it! If everybody follows this lead, then you could all feel trapped with uneconomic pricing!
If you do find yourself with cheap pricing, people will still expect to get what they pay for!
This involves setting the price for a product or service based on the total cost of providing it plus a required margin. If a product or service cost $100, then with a 20% margin, the selling price would be $120.
There is some science in this approach, however it doesn’t take into account the market for the product or service. If you are a great deal cheaper or more expensive in your costs than you competitors, then you could find yourself with pricing that may or may not be sustainable in the industry.
This is typically used by service based businesses. There will be an industry average, however an individual may price above or below depending on experience, service provided and quality of work. Determining your hourly rate is subjective, but a rationale can be applied to justify a decision.
Project Based pricing
A fixed price is set for completing a project. This can be dangerous as if you get your calculations wrong, you could end up with losing money. Just ask operators in the building industry! Many a business has gone horribly wrong when quoting a fixed price for a large project!
This approach involves deliberately pricing below market to grab market share. The plan is to lift prices at a later date. This approach can be dangerous as it could become difficult to lift prices at a later date without losing a lot of the market share gained!
Price Based on Value
The price is set based on first determining the value of the product or service, then setting the price below that, so that the purchaser feels that they are getting something worth more than they are paying for it. The challenge with this option is the amount of effort required to determine that value, however it makes it easier to convince a purchaser once that information is available.
This involves setting a price deliberately at a premium to others in the market. This is the ideal option as it enables a business to achieve the greatest margins.
How do you achieve premium pricing?
- By having a product that is clearly definable as being superior.
- By effective branding.
Even if your product is not better than others, if you do a great job with your branding, then you can develop loyal followers that will believe your product is the best! Apple may or may not have the best products, but given the effectiveness of their branding, people will flock to buy their products without question, with those prices typically more expensive than their competitors!
You can deliberately develop your brand to be perceived as premium and if successful, it will enable you to charge premium prices even when your product may not be superior.
If you can convince people that they will get greater value with your products, you can charge higher prices.
Interestingly, people expect higher price goods will be of a higher standard, which may or may not be the case. Equally, people have lower expectations for products bough cheaply!
Spend your time developing your brand and communicating the great value people get with what you do or offer, then you can move away from direct price competition and focus on a premium approach to pricing.