When evaluating pricing strategies entrepreneurs often struggle in this process. They don’t want the price to be too low in order to make a decent profit but they fear if they make it too high consumers will flee to their competitors. It can be difficult developing a price that works well for consumers and you however it is a critical and influential step to the success of your business. Here are some helpful tips for developing a pricing strategy.
#1 Know your target market
Is your business planning to sell more for less, or less for more? For example a high end restaurant targeting wealthy individuals may sell 20 sandwiches a day and charge $30 each but another restaurant targeting the average consumer may sell 300 sandwiches a day and charge $2.00 each. Each restaurant has made the same amount of sales revenue but the first sold less quantity for a more expensive price and the last sold more quantity at a cheaper price. Both are very different but each can be just as effective.
It is essential that you know your target market (targeted customer) in order to develop a pricing strategy that is appealing to them. Is your business targeting high end consumers or a budget conscious consumer? If you are targeting high end consumers your price will be higher but your products or services should also be of higher quality. If you are targeting a budget conscious consumer (bigger percentage of the population) be sure to have competitive prices.
#2 Find out the minimum cost
Figure out the costs to sell one product (or service) in your business. In this estimate include factors such as a percentage of advertising, rent, insurance, labor and other factors involved in selling that product. This is the minimum price you can price your product in order to not acquire a loss. However you should price higher than you minimum price in order to acquire a profit. Knowing your minimum price will help you develop a pricing strategy that will be attractive to your customers while keeping you in business.
#3 Research Competition
When developing a pricing strategy it is essential to look at your competitors. How is your competition pricing their products or services? If you choose to price your product or service higher than your competition be sure that your product or service is better in some way or supplies consumers with something that your competition doesn’t. Consumers may choose to pay more for a product from your business because of factors including a convenient location, great customer service, reliability and incentives. For example there are many people who choose to buy popcorn, candy and drinks at the movie theater even though they know they can get the same products elsewhere at a much cheaper price. Factors such as convenience can influence buyers to pay more. Conduct market research to find out what drives your target market to your business. You may be surprised that it is not always lower prices. Since lower prices is often a big factor for budget conscious consumers keep an eye out for suppliers that offer your products at a cheaper price.
#4 Test your prices
See how consumers respond to your prices. You can try selling your products at fairs to get an idea of how buyers respond to different prices. Do they nod in disagreement? Are they pleasantly surprised?
#5 Be willing to adjust Prices
Be willing to change prices to reflect changes in the marketplace. Factors such as costs of your business, and customer demands should all be taken in consideration. Remember you want a price that will appeal and attract customers but you have to make sure you are making a profit.
#6 Avoid Price Wars
Avoid price wars with your competitors. A price war is when your competition lowers their prices and as a result you lower your prices which causes your competition to lower their prices even more. Instead of falling into a price war with your competitors, develop a more effective strategy. For example think of something that you can offer that your competition doesn’t which can attract buyers to buy your product or service even though it may cost more. These factors can include incentives, bonuses and more.