Stephen King is President and CEO of GrowthStrengtha leading provider of outsourced accounting and bookkeeping services for businesses.
Whether you’re starting from scratch or have an established business that’s struggling to turn a profit, pricing — and pricing right — is critical to business success.
Pricing not only affects your profits, but also has a significant impact on your customers and how they perceive your business. If your price is too high for the perceived value of your business, you risk losing customers. If you set prices that are too low for the perceived value of your business, you risk losing customers (and perceived brand value) to prices that make your brand look cheap.
So how can you determine the right price for your company’s products or services? You need a pricing strategy.
What is a pricing strategy?
A pricing strategy is a method that a company can use to determine the most appropriate price and pricing structure for its company’s products and/or services. A pricing strategy involves pricing analysis and an evaluation of pricing structures, both of which should be done before a company implements a new pricing method and evaluates its success.
Seven Steps to Finding the Best Pricing Strategy for Your Business
1. Start with a price analysis.
Before choosing a pricing strategy for your business or setting your prices, you need to do some pricing analysis. This includes looking at your competitors, industry, geography, costs, market and demand to assess your pricing potential in addition to the most popular prices and pricing structures and more efficient. Think of your successful competitors as examples of what you want to do and your underperforming competitors as examples of what not to do.
2. Know your real costs.
Next, it is important to know your actual costs. In product-oriented businesses, calculating the cost of goods sold is easier since most of the costs are in direct materials. Service-based businesses, however, will have a little more difficulty controlling the true cost of the services they sell. You’ll need solid time tracking procedures in place that allow you to track how much time your employees are spending doing different types of work and serving different types of customers to determine your true direct labor costs.
3. Know your brand value.
Understand where your business stands and where you want it to be in terms of perceived brand value. Do you see your business as a budget option, a middle-of-the-road option, or a luxury option? Understanding your brand value will help you logically and more appropriately place your prices among those of your competitors.
4. Explore pricing strategy options.
Different pricing strategies and methods can dictate where you set your prices and how you charge your customers. Countless strategies exist, but not all of them will work for you. Pricing strategies largely depend on what you sell, where you sell it, your business structure, how you market, and the type of customers you serve.
Some of the more popular pricing strategies include:
• Cost plus pricing
• Pricing based on competition
• Project-based pricing
• Hourly rate
• Price based on value
• Free pricing
• Dynamic pricing
• Very low price
• Penetration pricing
• Geographic pricing
• Skimming Pricing
• Superior pricing
• Psychological pricing
5. Choose a strategy that suits the type of business and the industry.
Certain pricing models will be more or less appropriate for your business depending on your industry and business model. For example, cost-plus or ultra-low pricing models are more appropriate for retail or product-based businesses, while project-based pricing and subscriptions tend to be more appropriate for enterprises. service oriented.
6. Protect your prices and profits from inflation.
Prices are not permanent mainly because the market is constantly changing and the cost of goods sold will always change and change.
More often than not, costs increase over time due to inflation, and this effect has been even more pronounced over the past year with incredibly high inflation rates. For this reason, it’s important to choose prices that provide a large enough profit margin that you don’t need to constantly adjust and raise prices due to rising inflation rates.
In the fortunate event that your company’s cost of goods sold declines, you have the option of taking advantage of your fattened profit margins or passing the savings on to your customers in the form of discounts or temporarily reduced prices.
7. Practice proactive leadership in pricing.
In order to maintain healthy profit margins, you need to closely monitor your costs, revenues, competitors, demand, and pricing structure. While I don’t recommend changing your pricing all the time, as your customers like to be able to trust that their costs will fit within their own budget, you should re-evaluate your pricing structures at least once a year.
However, if your business makes an essential product or service, you might have more flexibility to change prices more often. For example, people continue to buy fuel despite rising costs, but they buy fewer movie tickets when movie theater prices rise. This factor is known as the price elasticity of demand and can be calculated using the following equation: Price elasticity of demand = % change in quantity / % change in price.
In an uncertain economic climate marked by high rates of inflation, you can simply adjust your prices more frequently to reflect the increased costs you incur. Your customers will understand and be less surprised than they would be if you adjusted prices frequently during more stable economic times.
Accurate reporting for business management is more important than you think.
Every small business owner knows they need bookkeeping and accounting for tax compliance and filing, but not all new business owners realize how much their accounting services can affect how they run, run and run their businesses. With up-to-date financial data, business owners can easily assess their pricing and pricing strategy while analyzing new strategies and potential pricing changes.
So, as you improve your pricing strategy and settle between maximizing sales and maximizing profit margins, make sure your accounting team helps you maximize the success of your business.
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