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Running A Profitable Business: 5 Best Practices To Get Pricing Right
When running a profitable business, one of the most important decisions you’ll have to make is how to price your products or services. Pricing determines the profits you make, how your business survives in a competitive market and customers’ general perception of your business – amongst very many other things.
Your pricing strategy should align with your long-term business goals. What makes it tricky is there’s no one correct pricing strategy to have to follow. Pricing is influenced by many things such as demand and competition. Therefore, it can be a result of a combination of different factors, subject to change at various different times.
Services are even more complex to price than products, simply because they can vary so much from one service to another. Typically, for service businesses such as those engaged in cleaning, plumbing, landscaping, or contracting for example – estimates are shared before a service is provided to gauge how much a specific job will cost. Jobber is a field service industry software provider that offers free fully customizable estimate templates that are particularly useful as they can be converted into an invoice after a job is completed. The amount quoted in the estimate depends on the assessment of the job prior to it being carried out.
With that in mind, this article discusses some of the best practices to help you get your pricing right:
Consider the expected profit margin
Businesses start operations with an acceptable profit level in mind. Profits are arrived at by subtracting the total costs of production, marketing, selling, logistics, labor, and other overhead costs from the total revenue. Therefore, your pricing strategy should start with a “profit-margin target” strategy. After calculating the total cost of your product or service, you can add the expected profits to get the revenue figure. From there, you divide the revenue by the number of products or services to get the price per unit. (1)
This strategy is effective, considering that production costs vary depending on location and season. Calculate this clearly using a spreadsheet for ease of reference or by using this free profit margin calculator. This will help you to stay within the budget where possible and have a strong handle on the financial health of your business.
Dynamic pricing is a strategy that allows you to change the prices of goods and services depending on demand and supply. When demand is generally low, you can reduce the prices of your services by reducing the expected profit margin. This helps ensure that the business attracts more buyers and compensates for the low prices by making more sales. (2)
Conversely, you can charge more during busy seasons to help offset the low profits made during the low seasons. This strategy is particularly effective for smaller businesses. (2)
Consider the competition
Competition-based pricing is simple, and most businesses use it to gain control of their market position. This strategy uses your competitor’s prices on similar products as a benchmark for your products’ prices. It relies on market data rather than the production costs or value of items. Therefore, it can be an advantage if your production costs are lower than your competition or a disadvantage if it’s higher. (3)
When using a competition-based strategy, you should note how the market perceives your products and the competitors’. If you’re providing a better value proposition, you can charge more. However, be cautious about the region you operate in and your associated business costs. (1)
Your customers are the ones to feel the convenience or the burden of your prices. As such, you need to have a deep understanding of who your audience is. Doing market research will help you identify the different segment groups of customers and what they prefer. This helps you in pricing and marketing your products or services. Customers can be price sensitive, value-sensitive, convenience-centered, or buy due to status. Your business will be in a stronger position by knowing this. (1)
Your core customers should dictate how you set your prices. For example, if the core customer base is value centered and you want to sell to a price-sensitive segment, provide more value and charge a higher amount to the core segment. You shouldn’t risk reducing prices for the core customer base. Instead, reduce the value of the price-sensitive segment and charge less to not interfere with the core customers. (4)
Practice price skimming
Price skimming is the process of leveraging the demand of products or services during launch to set high prices and then readjust the prices later on. This strategy is common among celebrity product lines and reputed brands, where they make profits during the launch, even if the prices don’t reflect the value of the products. (3)
After the product’s launch, the prices will be lowered to attract the price-sensitive customer segment. You can use this practice to leverage willing customers who will be the first to use the products. Therefore, you maximize returns by skimming off the top of each customer segment. (2)
Running a profitable business largely depends on the pricing. As stated earlier, the pricing will determine how much revenue you generate and how customers perceive your business. By following the best practices discussed in the article, you will be empowered to get this right for your business and the products or services you offer.
- “How to Price Your Products”, Source: https://www.inc.com/guides/price-your-products.html
- “7 Smart Pricing Strategies to Attract Customers”, Source: https://www.uschamber.com/co/run/finance/pricing-strategies-for-your-business
- “Five good pricing strategy examples and how to benefit from them”, Source: https://www.sniffie.io/blog/five-good-pricing-strategy-examples/
- “5 Steps to Improve your Pricing Strategies – Value of 1%”, Source: https://www.pricingsolutions.com/pricing-blog/5-ways-to-improve-your-pricing-strategies/