The way you price your products and services can mean the difference between growing your company or creating problems that you can’t recover from. This means that figuring out the best pricing strategy for your target market has many implications for your business.
There are a number of factors and pricing “weapons” to consider. A good starting point is to ensure your pricing aligns with your long-term company strategy. Have you positioned your company as a low-cost provider like Kmart? Do you have a differentiator for which you can charge more, like Tiffany and Co? Or are you focused on a specific market, say for example men aged 20-40 who race fast cars?
Pricing below cost
Sometimes, it is beneficial to sell at below cost. But is important to make an informed choice.
Imagine you are trying to get a prospective customer to purchase for the first time. You believe they value what you offer and could be a good long-term customer, but you are having problems closing the sale. Consider the lifetime value of that customer, their monthly revenue or profitability multiplied by the number of months you think the customer will buy from you, and whether or not they could buy even more, over time. Then adjust the price low enough for a specific period to get them to “buy and try.” Make sure they understand that when the trial period is over, the price will need to go up.
Take another scenario: a competitor has introduced a product or service similar to yours and is trying to get your customers to switch to them by pricing their product lower than yours. Dropping your price could protect your market share until your competitor retreats from the market. But it could also start a price war. Maintaining your price and your profits will enable you to have the resources to add more value to keep the customer. Value-adds that can help wade off competition could be expedited processing or faster shipping. Be sure your customer understands the value you are providing and how much better your product is than the competitor’s, and the risks are of switching from your product to theirs.
Pricing above cost
Never assume people will only pay the lowest price. If you have a new product or service that people value, if you’re the only game in town, or if people are not price sensitive, then don’t be shy. Set your price and make sure it includes a generous profit margin.
If there’s a market shortage, for example, a drought impacting the availability of almonds, people will expect to pay more for almonds. If you have a supply of almonds, you can price them at a premium. At the same time, when demand is high people are also willing to pay more. Pay close attention to market supply and demand, and raise your prices when you can foresee demand will outstrip supply for what you are offering.
Different prices for essentially the same product?
If you sell some of your almonds to a company that retails them under their brand and in premium packaging, that’s called “white labelling”. Even if the almonds you sell in a bag with your brand are exactly the same as the white labelled almonds, customers will be willing to pay more for the better-known brand.
Subscription pricing is often used for mobile phones, internet, software subscriptions, flower deliveries and wine clubs. Many companies like monthly subscriptions and auto debits because it provides a predictable monthly revenue, and creates “stickiness” binding more customers to your business.
In summary, you have many pricing weapons to consider when you are going to market. Choose those that will provide you with the best opportunity for growth.
Mick O’Rourke, Growth Expert, the Australian Centre for Business Growth at the University of South Australia