When in business or starting a new business, one of the challenges business owners face is to set product or service pricing as it can change frequently based on current market conditions, overall operation, overhead expenses and more importantly due to the competition.
Common thought process that many business owners possess:
Unfortunately most business owners spend a substantial amount of time and energy to implement strategies of price wars and this is not the effective way to develop a sustainable business.
Whether it’s a new business or an existing business adding a new product or service, the cost should not be set as low to begin with because majority of the time pricing goes through reduction phases primarily due to tougher competition. There are some strategies that can help create a cushion in the pricing structure so that when the business owner has to make changes to the pricing, the change will hardly put any negative impact on the profitability. Here are some of the key elements to consider:
Business owners should not set pricing based only on what the competitors charge because the business will encounter various competitive blind-spots that can hurt its sustainability. Competitive cost analysis is all about understanding the market conditions and strengths and weaknesses of a potential competitor, especially in the area of marketing and operation. Profile all relevant competitors and sources to develop and implement an effective pricing strategy. GIS (Geographic Information System) and zipskinny.com are relevant and often the best tools to conduct market research and competitive cost analysis in specific or multiple regions.
From a prospect’s perception it’s all about “what’s in it for me” and “why should I buy from you?”. Pricing can often be the ice-breaker to convert prospects into customers but then it can also discourage prospects if they feel that the price is too high, in which case it becomes even harder to convince the same prospect to revisit business offerings for reconsideration unless the business owner demonstrates value proposition or the value behind the pricing.
At times even the value proposition does not convince the prospect when the prospect feels that the cost of the products or services is higher than what they intend to spend. This is why it’s important to know your target market. What exactly is the target market? Simply put, it’s understanding who potential customers are and where are they. This can be done by conducting demographic research. Once you have specific regional data that shows household income, spending and competition, you can set the pricing accordingly. This will also give you a clear advantage over the competition in terms of one or more elements of the marketing mix that is valued by potential customers.
Implement organizational and productivity tools such as CRM (Customer Relationship Management) or CMS (Customer Management System) and collaborative online portal with extranet. These tools are cost effective and are designed to track, interact and engage with business clients, prospects, partners and sub-contractors. It’s also designed to save substantial amount of time. These tools are extremely helpful to a single owner operating a business just as much as it is to different size businesses. It gives business owners a competitive edge and more importantly it reduces administrative and man hours. Part of the savings can be passed on to customers in the form of better pricing options.
For most service based businesses, pricing can be structured in a few simple to understand tiers. This provides more attractive options to prospects and more importantly helps connect with the diversified target market. If the business offers multiple services then it’s always good to add some discount based on the add-on service options. Also consider providing all inclusive bundled discounts.
Setting up pricing for products is very different than setting up pricing for service options. Each category of the product from the line of clothing to consumer electronics is different. If the product is manufactured in-house then that becomes another pricing formation depending on the cost to build standard products versus custom build options.
Even though not all businesses are the same, many businesses serve the same target market. Business owners should monitor and measure prospect interactions and make necessary adjustments in pricing as needed. Guess work can lead to pricy mistakes which is why planning and cost analysis are crucial in setting up pricing.