The price that is set for products and services is one of the most crucial decisions business owners and managers must make. Entrepreneurs, new businesses and small business often give too little thought to this highly complex matter and the consequences can be dire. Pricing requires thought and an understanding of the customers or clients, the market, the environment and your competitors. Consider my eight pricing rules to help you price effectively.
Every business, regardless of whether it is a large and established business or a start-up business, has a position in the market place. Byronvale Advisors, for example, is a management consultancy but its niche is, “Recovery, rebuild, restructure’. It also has a tagline of “Turning business nightmares into dreams”. Being able to succinctly define your niche or position in the market gives you a foundation on which to base your pricing.
The product you produce or the service you provide must have some inherent benefit to the customer or client. For your customer or client, the product or service will either make more money for them, save money for them or provide them with some other benefit that is non-monetary such as warmth, comfort, safety, etc.
Making money and saving money benefits can be calculated and used as a check to see if your pricing is competitive. Nonmonetary benefits are harder to calculate but they will be compared to the benefits the products or services of your competitor can provide, e.g. warmer, closer, locally made, etc.
Objectively look at your competition and determine how close your product or service is to that of the competition. The closer you are, the closer your pricing needs to be to the competition.
As well as understanding fixed and variable costs of a product or service it is also important to understand your sunk costs. Sunk costs are costs that have occurred in the past that can no longer be controlled or managed such as patents, the cost of incorporation, research and development, etc. Sunk costs should not be included in the pricing unless your product is first to market or there isn’t a substitute product.
A buyer of your product or service pays the price they value your product or service at. The buyer does not consider your costs. The price should, however, always be greater than the minimum cost to provide your product or service.
Reducing and raising prices both contain an element of risk, however reducing prices is less risky than raising prices. Demand is likely to reduce faster if you raise prices rather than reduce prices. Price increases should only be looked at after your product or service has been in the market for a while and is established.
Consider your brand and what that brand is trying to portray to the market. If your product or service is a discount or low value brand, then the price should reflect that. Conversely, if your product or service is prestigious or exclusive then the price should also reflect that.
Over time, the market and environment where you are selling your product or service changes. These changes affect your costs and the benefit or value they give your clients and customers. Therefore, they also must affect the price. Services can normally react faster to market and environmental changes than products such as retail or subscription products.
Stephen Barnes, Principal, Byronvale Advisors