In our 30 years of working with small and medium sized businesses, a common challenge faced by clients is determining the right price for products or services. Not just the retail price but the level of discounting you’re prepared to make to win volume business and how to empower the sales team to identify when to win a sale by applying some discounting when it’s necessary and appropriate.
Setting a price point is obviously necessary when a new product or service is offered but it is also worthwhile reviewing your price points in the following situations:
- Competitive landscape changes – new competitors, competitors exiting, legislative change impact the barriers to entry
- Cost changes – changes in your cost of sales; changes in your overheads
- Strategy to grow revenue changes – where you want to aggressively grow market share and current pricing is inhibiting this.
Price setting should be made with full visibility of ‘all the numbers’ and the external factors you don’t control. All businesses what to price in a profit margin that reflects the risks and effort involved with being in business but you won’t want to price yourself out of the market, so how do you know if your price is right?
Here are five factors to consider when pricing your products or services.
First and foremost you need full visibility of all the numbers. Before you set your pricing, work out the costs involved with running your business. These include your fixed costs (the expenses that will be incurred every month regardless of sales) and your direct costs or costs of sales (the expenses you incur by producing and delivering your products or services). If your financial accounts aren’t splitting out your fixed costs from your cost of sales, that is an area for further discussion, as you are not likely to be getting the full picture of your business’s financial position without that.
Know what your customers want from your products and services. Are they driven by the cheapest price or by the value they receive? What part does price play in their purchase decision?
Also look at what you are selling, are your current customers buying high-end or low-end products and services? This information will help you determine if your price is right, what level of service or inclusions you should be offering and lastly if you are targeting the right market. It may be that you need to change the market you actively sell to to make your business more profitable.
Once you understand your customer, you need to look at your positioning. Where do you want to be in the marketplace? Do you want to be the most expensive, luxurious, high-end brand in your industry, the cheapest, beat it by 10% brand or somewhere in the middle? What customer experience do you need to deliver in order to support that positioning, can you deliver that? Once you have decided, you will start to get an idea of your ideal pricing and potentially other customer service strategies that need to be implemented.
This is one of the key times you can give yourself permission to do a little competitor snooping. What are they charging for different products and services? What inclusions and level of service are they offering for those prices? What customers are they attracting with their pricing? And how are they positioned in the marketplace? The answers to these questions will give you an industry benchmark for your pricing.
One of the most important questions business owners often neglect to ask themselves is, "How much profit do I want to make?" There is a tendency to look at what the nearest competitor is charging and then pull a figure out of the air to be competitive to win the business without giving consideration to how much profit should be made.
There are risks and cost of capital associated in being in business, so it is very important that business owners achieve a minimum return hurdle and put in place simple tests to apply in everyday business to deliver into this. Sharing these tests with the sales team or others authorised to make pricing decisions can go a long way in ensuring all business worth winning is won.
Thanks to Amanda Jesnoewski for contribution to content.