SBEC shares tips on how to effectively set prices as a small business |  bloginfo(‘name’); ?>

October 14, 2022 0 comments

pricing policy

Whether you are manufacturing a product or providing a service, it is important to have a pricing strategy that is both competitive and profitable. How much your customers are willing to pay for your product or service depends on the quality you offer, the prices of your competitors, the uniqueness of your product, and the passion of your customers to take advantage of your specific offering.

The price you ask can mean the difference between a profitable or unprofitable business. When pricing, make sure the price is high enough to cover all your expenses and provide a reasonable profit margin. If your products are significantly more expensive than your competition and you haven’t created a clear competitive advantage, you will face falling demand. By understanding how your target customers make purchasing decisions, you can set prices within a reasonable range. Business owners also need to evaluate how important price is to the customer. In some cases, price may not be a determining factor when a customer needs a product or service.

How do you set the prices?

The first step in setting prices is to fully understand all of your business costs. The more accurate your calculation is, the greater your chances of a successful business. Your costs fall into two distinct categories – fixed costs and variable costs. Fixed costs are those you have to pay regardless of the amount of revenue you generate. Items such as rent, utilities, insurance, and taxes are examples of fixed costs. Variable costs are directly related to the production and/or delivery of your product or service. Things like raw materials, manufacturing labor, packaging, and shipping/shipping costs are some examples of variable costs. The amount of these expenses depends on how much you produce.

Four types of pricing strategies

There are many types of pricing strategies and depending on the industry you are in some will work better than others. Certain strategies are best suited to a new company or a company entering a new market, while others are best suited to companies that are established market leaders.

Competition-based pricing focuses solely on the competition and the current market price for a product or service and ignores the actual cost of the product. Businesses that market their product or service in a highly competitive environment may need to employ this strategy as the consumer may buy based on price and may not be willing to spend more for a product or service that they consider fundamentally identical perceives with others. You can also encourage a buyer to choose to buy from you by differentiating your offering with a more liberal return policy, extended credit terms, or improved customer service.

Cost-Plus pricing takes into account the cost of producing a product or providing a service. It takes into account both hard and soft costs and then applies a markup according to the company’s profit expectation. In this case, the market price is used to validate the resulting price. If the price is significantly higher than the competition, a cost review must be carried out and either savings found or the mark-up adjusted.

The most common pricing model is value-based pricing. In this scenario, pricing is based on the customer’s willingness to pay. To maximize both sales and profits, you need to identify your customers and understand their wants and needs. This process begins with a thorough market analysis to find an ideal target customer. Once you have identified your target customers, you need to determine the value they place on your product’s features and benefits. The final step is to perform a price sensitivity analysis. This allows you to determine both the minimum and maximum price that the customer is willing to pay. Your final price should be somewhere in that range.

Penetration pricing can also be an effective strategy when entering a new market or launching a new product. Here the price is set artificially low to attract customers. This model isn’t sustainable in the long term, but it allows you to get noticed in the market and it’s a way to quickly build a loyal customer base. Once the business is established, you need to raise prices to increase profitability.

Pricing is one of the four “Ps” of marketing, along with people, placement (distribution) and advertising. Whatever pricing strategy you choose, always make sure it is consistent with the way you want your customers and competitors to perceive you, and that it is consistent with your promotional messages, the places where your product sells is sold and the type of packaging matches.