…as startups fight to stay afloat
Choice of pricing strategy is critical when selling a product or service, particularly for budding entrepreneurs. The price can be set to maximise profitability for each unit sold or from the market overall. It could also be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. Here are a few tips in crafting a customer-centred pricing strategy, inspired by smallstarter.com.
Costs: how much profit can you make at that price?
To survive and succeed in business, you need to make profit. Profit means that you are selling your products or services at a price that is higher than the amount it cost you to make the product or deliver the service.
Before you set a price for your product, you need to be very sure that it covers your costs and will make you a profit. Apart from the cost of making a product, you also need to know how many products you need to sell in order to turn a profit.
The problem is, many entrepreneurs just set a price that looks good without first checking if the price covers their costs and will be profitable. If you set a price that favours your customers, but is bad for your business, it will only be a matter of time before you won’t have a business anymore.
Just to be sure that you fully understand what your costs are, it is important to understand some basic knowledge about costing.
There are essentially two main types of costs you should consider. Here they are:
Direct costs – these are the material and labour costs that are directly involved in the production of a product or service. For example, if you produce fruit juice for sale, the cost of the raw fruits you bought from the local market and your transportation to and from the market will be calculated as direct costs for the production of the fruit juice you sell.
Indirect costs (or “Overhead” costs) – these are costs that often cannot be directly traced to the products or services you sell. Things like insurance, security, bank charges, electricity, telephone bills etc. are categorized as indirect costs.
Lesson for entrepreneurs
As long as you are not in business for charity, you have to make profits to survive. Period! And one of the most important steps to determine the best price to set for your product or service is knowing how to calculate your costs. If your cost is more than your price, it’ll only be a matter of time before you run out of business.
Competition: watch their pricing closely…
Anyone who does business knows that price is one of the effective ways of attracting customers to your product or service. This is why you need to always consider the pricing of your competitors.
Do not be naïve, consumers are smart; they always want a fair price. They will always compare your price against your competition, and if a competitor’s product is cheaper and there’s no major difference in the value of the products, you could lose customers to your competition.
Business is a race. You need to constantly make sure that your product or service is competitively priced, especially if your products and services are similar to those offered by the competition.
If you want to price your products higher than your competition, you need to offer something extra or different; you have to differentiate your products. Because, the more similar your products or services are to the competition, the more likely it is that customers will always compare your prices with others.
Higher quality, loyalty programs, convenience and value are some of the things that could set you apart and allow you to charge higher than the competition.
It is always a good idea to find out what your competition is up to. Phone calls, secret shopping and published market data are some of the ways you can get valuable information about your competition. Buy from your competition to test their products and evaluate it from a customer’s perspective. Can you offer a better product or service? Can offer the same thing at a competitive price and still make a profit?
Lesson for entrepreneurs
Always remember that you’re not in the market alone. The next business will be looking for ways to attract more customers and pricing is often the favorite weapon. If you were the only business selling a particular product or service, you could set any price you want. And as long as your product is valuable and the price is reasonable, people will buy.
As long as you have a competition that is looking for new ways to attract the same customers you’re targeting, price would always be a big influencer. Don’t make the mistake of ignoring your competition’s pricing only to wonder why they are selling more products than you are.
Demand: how hungry is your market?
More than 99 percent of consumers only buy products and services they need or desire. Why buy something you don’t need or desire?
But there are times when people are ‘forced’ to need and desire certain products and services. In such periods, the demand for these products and services skyrocket beyond the supply in the market. When such events occur, it is usually an opportunity to raise prices!
For example, during festive seasons like Christmas, New Year and other religious and national celebrations, the demand for food products automatically increases. Why? Because more people than usual will want to buy foods like rice, chicken, drinks etcetera to celebrate with their families.
Before the Ebola outbreak in West Africa, not many people knew about or had used a ‘hand sanitizer’ before. The demand and price of this gel, which is usually applied on the hands to kill germs, skyrocketed. The huge unprecedented demand for this product made it a highly-priced product overnight.
A few years ago, Nigeria introduced a new policy that made it compulsory for motorcycle riders to wear crash helmets. Guess what happened? The price of crash helmets rose by more than 500 percent! That’s what happens whenever the demand for a product outstrips its supply in the market.
To get the best price for product or service, it’s always a good strategy to target periods of high market demand. Is there an event, trend, government policy or occurrence that could lead to a massive growth in the demand for a product or service?
Lesson for entrepreneurs
By targeting times of scarcity or excess demand, you could increase your pricing as a strategy to make more profits. These opportunities are not available throughout the year so it makes perfect sense to exploit it the most you can.
