One of the biggest challenges for any business is setting prices for its offers. It’s also one of the most important obstacles to tackle, as it directly affects the bottom line. Here are some things to consider to make sure you get your pricing right the first time.
Before you can even consider pricing, there are two factors you need to understand well: your audience and the market.
You should have a customer profile that tells you what problems your audience faces, how they shop and feel about money, and what they perceive as valuable. The goal here is to position your product or service as offering unique value that helps them solve their problems.
The other factor is the market. Get to know the competition and study products similar to yours that they’re selling. This will give you an idea of what the market will pay, and you can position your product accordingly.
The most basic tactic for pricing your offering is called cost pricing. You calculate the cost of producing and delivering your product, and then set your price so that you receive the margin you want.
However, this isn’t the most strategic approach since it only considers the product and not the market. It’s important to understand cost pricing so that you ensure profitability, but the right price is all about perceived value, not actual cost.
Undercut the Competition
With knowledge of your competition and customers, you can set a price that the market will be willing to pay. One strategy is to undercut the competition. This will give you the low-price advantage and make it easier for you to draw away customers who are unsatisfied with your competitors’ products. You’ll be offering a cheaper alternative.
But even if you choose to be the low-priced alternative, you still need to drive home the unique value of your product. If low price is your only selling point, it’s easy for a competitor who can take a loss to undercut you and steal away your customers. It’s not enough to be the cheapest option.
Price Your Product Higher
Another strategy is to price your product or service just above the competition’s. In order to do this successfully, you’ll have to position your product as offering something more. Your branding should tell people that this is a luxury product or a product with expanded features.
You can get away with charging more than the competition if you ramp up your marketing by doing things like:
- Emphasizing the uniqueness of your product, such as special features or customization options the competition doesn’t have.
- Laser-targeting your market by getting as specific as possible; for example, focusing on a specific segment and tailoring your marketing to that audience.
- Add urgency to your marketing. Set a limit to how many units you’ll sell or a cut-off date for taking orders. When there are limited supplies, people will be more likely to perceive your product as rare and valuable and therefore more willing to pay extra for it.
Start researching your pricing early, even in the beginning stages of product development. Use the data you uncover about the market and your customers to set a price they’ll be willing to pay. This decision usually takes longer than most businesses expect, and it’s not something to leave to the last minute.