A strategic pricing plan that aligns with product value, customer expectation, market dynamics and operational costs will empower your business to capture market share, optimize profitability and achieve a competitive edge.
Know your costs
Categorizing your costs creates a clear understanding of cost structure, allowing you to get one step closer to pricing your products or services.
Start by categorizing your costs into these categories:
- Fixed costs: remain constant regardless of production or sales volume, including expenses like rent and salaries.
- Variable costs: fluctuate with production levels, like raw materials and labour.
- Mixed costs: combine elements of both fixed and variable costs, often seen in utilities or maintenance.
These numbers will directly impact your product’s break-even point and profit margins. Having an accurate estimation allows you to set prices that cover your variable and fixed costs.
Understanding what customers are willing to pay will have a huge impact when you’re pricing products. Market research is the best way to uncover the perceived value of your products and services, while allowing you to create evidence-based estimations of what your customers are willing to pay. When you understand consumer behaviour and price sensitivity, you’ll be better equipped to create a pricing strategy that allows you to gain profits while meeting your customer’s needs.
Market research will also help you understand what competitors offer. Your competition’s value proposition allows you to understand how they set their prices. Knowing your own value proposition and differentiators will allow you to see how you can price your products relative to competitors.
Research will reveal pricing trends and provide information on current market conditions and expected changes. Market research validates your pricing strategy and enables data-based decisions.
Value-based pricing: set on the perceived value your customers attribute to your product or service, based on their willingness to pay. Having a clear understanding of your unique value proposition will help you price your products if you go with value-based pricing, since this method considers more than production costs and profits.
Cost-plus pricing/markup pricing: involves adding a predetermined percentage of markup to the cost of production. Another way to look at this is adding profit to the break-even point. It’s a straightforward approach, but doesn’t consider perceived value or the competitive landscape.
Competitive pricing: uses market research to analyze the prices set by competitors, then positions pricing according to theirs (equal, above or below) depending on your desired results. This requires a strong understanding of the market and comparative value of your products.
Penetration pricing: set prices low to quickly gain market share and attract customers. This is effective when entering competitive markets or introducing new products. Generally, prices are increased gradually over time as the customer base grows. Be careful that this doesn’t become predatory pricing—deliberately setting low prices to eliminate competition.
Skim pricing: involves setting a high initial price for an innovative product to capitalize on early adopters and customers who might be willing to pay a premium price. As demand from these segments decreases, the price is lowered to attract customers who are more price sensitive. This strategy is designed to capture the widest range of different customer segments and maximize profit at different stages of a product's life cycle.
Psychological pricing: uses consumer psychology to influence people and purchasing decisions in your favour.
- Charm pricing: set just below round numbers ($1.99 instead of $2.00) to create a perception of a lower cost.
- Bundling: multiple products are offered together at a lower price than if purchased individually.
Adaptive pricing: involves adjusting prices over time to respond to changing market conditions, like demand fluctuations. This allows pricing to remain competitive and keeps the business profitable as time goes on.
Testing and revising
Discovering the best pricing strategy for your business relies on factors like target market, product differentiation and cost structure. Each of these strategies offers advantages and disadvantages, so go with the approach that aligns with your business goals. Monitoring the performance of your pricing strategy by keeping track of costs, revenue and profits allows you to make data-based decisions on pricing adjustments as you go.
You've laid the groundwork to set your prices, and now we'll look towards the future and building a long-term strategy for your business.