It is always an interesting exercise to work with clients to establish effect pricing strategies. There are many factors to be considered. They include product quality, competition, target demographics and marketability, and most importantly—profitability.
Let’s look at each of these areas. First, how is your product quality? For many small businesses this is fundamental to establishing a good reputation which allows the business to succeed. Durable products which provide lasting value in themselves establish value and will demand a greater investment.
Researching and understanding the other players in your marketplace is essential. I never advocate setting prices based on what the guy down the street is charging. However, knowing their pricing can help you in understanding where to position yourself in the market. You may be charging more and that is OK as long as you understand why and can effectively convey the reasons to you client.
Next, learn as much as you can about your market area and the customers you will serve. Find out what they value and research their buying habits and where they spend their money. What motivates their buying decision? Your pricing structure should be a reflection of what you have learned.
As you identify your client base, be sure your products are appealing and attainable. It is harder to sell a Lexus to a client who desires a Chevy Truck. Take a look at your past sales and identify those products which are selling the best. From there you can create a price structure which maximizes your profitability in those products.
A profitable pricing structure is essential and fundamental to keeping your business viable. Analyzing your price list to identify your costs and expenses is the quickest way to find your profit. Many times the lack of profitability does not mean your prices are too low. Generally the structure of your pricing can be adjusted to improve profits.
Be wary of “industry standards”. These numbers are generally skewed by the method the data is collected. If this data is submitted on a voluntary basis, it very well does not reflect a true cross section of the industry. Due to a wide range of variables pricing and profitability generally cannot be established for an entire industry. While these benchmarks can be interesting they should not be used to measure an individual business’ sales, pricing or profitability. To create profitable pricing, all of the areas discussed above should be taken into account. Your pricing structure should be a reflection of these factors which will assure your financial success