Setting the right price for your products and services is key to gaining profits, so a well thought out pricing strategy is a valuable tool to ensure business success.
Setting a pricing strategy: key considerations for business owners
Price should never be considered alone – it’s just one element of your marketing mix.
You also need to consider:
- Product/service: What do your customers want from what you supply? How much does it cost to provide and can you sell it profitably?
- Place: Where can customers find your product and service?
- Promotion: Where and when can you reach your customers with messages about your product or service?
Your pricing strategy should be based on:
- The value of your product or service to your customers
- How your price compares with your competitors’ products and services, and similar products within your portfolio
- How your typical target market customers behave
- Your brand image and share of the market
What are the key methods and pricing strategies?
The key elements of pricing strategy for any business are:
- Understanding what your customers want, need and how they behave
- Matching the value of your product or service to its price and making it clear what a customer is paying for
The main pricing methods
Cost base pricing
For cost base pricing, you simply calculate the cost of your product or service and then add a percentage on top, which is your profit margin or mark up.
The formula for cost base pricing is:
Selling Price = (Fixed Cost per unit + Variable Cost per unit) + Desired Profit Margin (%)
This type of pricing is mostly used where all competitors provide the same goods/service and price is the only difference between them.
Although this pricing method is simple to calculate, it takes no account of demand or of customers’ willingness to buy products or services at that price.
Value-based pricing sets a price based on the perceived value of a product or service, rather than cost of supplying it.
This pricing strategy is typically used in businesses that produce things like medicines, computer software, or luxury and designer goods.
Generally value-based pricing allows for higher profits on each item or service sold, but there’s a risk that customers may not be prepared to pay and choose a lower priced competitor.
Target return pricing
The formula for target return pricing is based on the profit you want to achieve divided by the number of sales you expect.
So, for example, if you’ve invested £5,000 in some goods and you expect to sell 1,000 of them, you’ll need to price each item at £5 to break even. And if you price them at £10 each, and still sell 1,000 you’ll make a 50% profit.
This type of pricing is useful for businesses who can accurately predict sales before investing in production.
Going rate pricing
This strategy involves setting prices to match the competitor’s products, usually the market leaders’ prices. It’s common among businesses that offer the same products, such as supermarkets or other retailers.
Top pricing tips for business owners
- Never rely on price alone. All elements of your marketing mix need to work together. For example, if you sell a product at a lower price than your competitors, your customers may think it’s of a lesser quality. That can have a long term impact on customer and brand loyalty.
- Make sure your customer understands what they’re paying for through your value proposition whether that’s quality, experience, reliability, or something else they value.
- Know your target market really well and segment it based on knowledge, data and facts. Let me give you an example: There was a very big, expensive hotel built in Turkey that was so expensive only celebrities could afford to stay there. But the business owners failed to recognise that their target customers had a huge choice of holidays, with summer houses, private yachts and jets to take them anywhere in the world. So the hotel business never established a loyal customer base and failed after 3 years because they didn’t understand their target market well enough and how it would behave.
When it comes to pricing, there are no set rules or best practice that you can follow to get it right. Setting the right price can be based on many different factors including the time of the year, customers’ willingness to pay, business targets and what your competitors are doing.
My best advice is… don’t rely on price alone to create miracles for your business. You must make sure products, place, promotion and price all work together.