When it comes to setting prices for your products and services, some startups are confused about how to go about it. Some do not even see the importance in setting the right price for their products.
That is the reason why this article will highlight some reasons why considering price is critical for your products and services. Here are the main points to watch out for:
- Price is set by the customer
- Price is how your customer profits
- Price determines cost
- Price creates Profit for the Customer
- Pricing helps increase your market share and beat the competition
- Pricing drives the profitability of products sold
- Pricing increases your market share and beat the competition
- To price in an ethically responsible manner
- What is Strategic Pricing Tips for Strategic Pricing
For some, the idea of prices from a business perspective should end in Nines. If you enquire more about why this is so, they will tell you that it is based on Psychology. Whatever the reason they give for this theory, customers are often expected to be more likely to buy something offered for 99 cents than for $1.
That been said, the customer will probably hand you a dollar bill in both cases, and they probably won’t care much about the penny they get in return. The little bowl of change next to the cash register in many stores is an indication that neither businesses nor their customers care much for those copper coins.
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In view of the above points, the question that comes to mind is, Does price really matter?
It is not a major concern in most startups, and it is not subject to much deeper thought. Very often, the price on the tag is just the estimated production cost plus some margin. Or it is an amount that seemed reasonable after glancing at what competitors charge.
Concerning pricing, Charles Toftoy, associate professor of management science at George Washington University said, ” It’s probably the toughest thing there is to do, It’s part art and part science.”
Despite this advice of varying value, pricing is in fact core to your business, and it is core also to succeeding as an entrepreneur. Pricing is about knowing your customer. The price you charge is what ultimately sells your product, tells a story to the customer about your business and serves as your guide for choosing your costs.
A high rate boosts the consumer’s assumptions regarding the item, your customer care and more. As well as an item that is anticipated by clients to have a high cost yet is used at a remarkably affordable price is no more a bargain– it is a factor for worry.
Envision a Porsche supplier offering brand-new Carreras for$15,000 each. Some may go all out, while several others will certainly question what is incorrect with those cars and trucks and also why a brand-new Porsche currently sets you back much less than a routine car.
Therefore, the Porsche brand name will certainly quickly decline.3. Cost establishes the cost. It seems in reverse, however, the cost is really figured out by the worth that your consumers anticipate.
Now, let us consider some 4 things you need to keep in mind when setting the price for your products and services.
Price is set by the customer
The reality of pricing is that, the price is not yours to set but to discover. A price that is too high will lessen sales and profits, but so will a price that is too low. The price needs to be just right. “Right” for whom, you might ask. The answer is that it must be right for the customer.
The right price is based on the value the customer expects, and thus the “profit” they make from your product. But they have plenty of products and services to choose from and will choose what gives them most profit — on their own terms. While you get to print whatever dollar amount you wish on the price tag, the simple truth is that the right price is not for you to set and has nothing to do with your cost.
Price is how your customer profits
Many have heard of the economics term “willingness to pay.” It makes sense when studying the efficiency of the economic system, i.e. how to get as much as possible for as many people as possible out of scarce resources.
But a much better way to think of it in a startup is the value, purely on the customer’s terms, that the customer expects from the product. The price must be lower than that value by some measure. Your price is the cost for the customer.
The customer’s profit is the difference between the price you charge and the benefit they receive. They too want to maximize profits. Thus, a deal they cannot resist is one where their benefit by far exceeds the price they have to pay. A happy customer is a profiting customer.
Price determines cost
It sounds backward, but the price is actually determined by the value that your customers expect from the product. They buy your product if you offer them a good deal in value terms.
Frankly, the customer couldn’t care less about your cost. Your job as an entrepreneur is to profit from the price that customers choose to pay. The only way of doing this is to let the price determine the cost.
Choose production process, materials and quantity produced based on the expected price, not the other way around. Cost is the entrepreneur’s primary choice variable.
Price creates Profit for the Customer
Many have heard of the economics term “willingness to pay.” It makes sense when studying the efficiency of the economic system, i.e. how to get as much as possible for as many people as possible out of scarce resources.
But a much better way to think of it in a startup is the value, purely on the customer’s terms, that the customer expects from the product. The price must be lower than that value by some measure. Your price is the cost for the customer.
The customer’s profit is the difference between the price you charge and the benefit they receive. They too want to maximize profits. Thus, a deal they cannot resist is one where their benefit by far exceeds the price they have to pay. A happy customer is a profiting customer.
Pricing helps increase your market share and beat the competition
Considering the competitiveness that envelopes the retail world, pricing can be used as a shrewd tactic to protect your market share. In fact, it’s one of the best. If you’re in a pricing war with one of your competitors, a great way in which to beat them is to drop your prices.
Of course, as a small retailer, you do need to be careful in dropping your prices too low. As stated above, your price can give off a negative perception of your store. But it’s more than that. While you might be making more sales, be aware of all possible long-term costs to your business. One consequence is a situation where after tallying up your monthly expenses, you find that your business is going under.
Once you’ve dropped your prices, and your customers have had time to try your product and develop some form of loyalty, you can push them back up again. Just make sure that the price you do settle on places your customer first.
Pricing drives the profitability of products sold
It can be argued that the quickest way to drive profitability is to sell more products. On the surface that sounds rational enough. Dig a little deeper, though, and it could be argued that this is not always the case.
Driving profitability – especially on a long term basis – comes down to better pricing, and that comes down to making investing in a pricing strategy. Who better to implement a pricing strategy within days (or even hours) than a small retailer? The fact that you can adapt to market trends faster than larger retailers give you the edge here.
For example, choosing a pricing strategy can help you to understand your customer’s value so that you have a better chance of turning a profit. Can you imagine trying to turn a profit when you don’t know what your customers value?
Dev Tandon, CEO of The Kini Group in an article on Business2Community made a very important point, he said, “Once you can articulate and quantify value increases, you have a much stronger foundation for asking for a proportional price increase and defending your existing pricing in the face of competitive pressures,”
Pricing increases your market share and beat the competition
Considering the competitiveness that envelopes the retail world, pricing can be used as a shrewd tactic to protect your market share. In fact, it’s one of the best. If you’re in a pricing war with one of your competitors, a great way in which to beat them is to drop your prices.
Of course, as a small retailer, you do need to be careful in dropping your prices too low. As stated above, your price can give off a negative perception of your store. But it’s more than that.
While you might be making more sales, be aware of all possible long-term costs to your business. One consequence is a situation where after tallying up your monthly expenses, you find that your business is going under.
Once you’ve dropped your prices, and your customers have had time to try your product and develop some form of loyalty, you can push them back up again. Just make sure that the price you do settle on places your customer first.
To price in an ethically responsible manner
Whether you are a large or smaller retailer, you have an ethical responsibility when it comes to pricing your products.
Imagine if retailers could pick and choose the price at which to sell their product. The market would be in chaos. Besides price fixing, practices like price collusion, price gouging, price discrimination, and more would be blatantly obvious.
With pricing strategies in play, though, it does become a much more civilized space. That doesn’t mean that there aren’t some pricing strategies that are unethical. Think predatory pricing, a strategy which aims to drive competition out of the market by pricing goods so low that other retailers can’t compete and are forced to close down.
But, together with regulatory laws in place, it does make for an equal playing field for all retailers.
At the same time, in pricing in an ethical manner, you are again putting your customer first. Remember, this isn’t about short-term gains and making as much money as possible before the government shuts you down. You want to build trust with your customers, encourage them to come back to your store, and spend more.
Now that we have seen the important points to keep in mind with regards to pricing, the above will guide you in determining the price tag for your products and services.
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Next, we are going to consider what is called Strategic Pricing and why it is important that you keep it in mind.
What is Strategic Pricing
Some define Strategic Pricing as value creation. Some define it as being competitively aware. Others will use it to describe establishing a company’s price levels and bands.
There are therefore a number of definitions and slight differences in opinion but generally, strategic pricing incorporates best practices in pricing and ensures that your pricing strategies, analytics, and pricing processes complement your business strategy.
Strategic pricing sets a product’s price based on the product’s value to the customer, or on competitive strategy, rather than on the cost of production.
This approach recognises that people often make purchasing decisions based more on psychology than on logic and that what is most valuable to the customer may not be what’s most expensive to produce.
By creating strategic pricing policies, analytics, and processes, you can directly capture customer value and turn that value into shareholder value.
Tips for Strategic Pricing
- Strategic pricing is a marketing decision, which means it should be informed by dialogue with your customers.
- Keeping a close eye on your competitors is important, but remember they are not the ones purchasing your product, and they may be making mistakes in their own pricing.
- Recognize what your customers value and charge them accordingly rather than going head to head on price with competitors.
Conclusion
The price you do decide on and the strategy you choose to increase the perceived value visiting your store versus the perceived cost will have an impact on your retail business. It could also help you compete against your larger competitors.
