What is the right price?

What is the Right Price for My Product?

This is one of the most common and crucial questions business owners must answer. You pricing strategy does more than drive profit on individual sales. It defines your business in the mind of a prospective customer, helping them place you in relationship to other companies in the market.

So how do you come up with that price?

There are many approaches to pricing. Some are easier to implement and manage than others, and some are more appropriate for specific types of businesses. Let’s take a look at some of those alternatives to help you select the right pricing strategy for your business.

Cost Plus Pricing Strategy

The is the simplest approach and very common in construction and contracting industries. Start with what it cost you to build or to provide a service. Then add your profit margin on top of that number. The “cost plus” your profit margin. If something costs $100 to build and you want to make $25, you sell it for $125.

While the cost plus approach will guarantee a profit, it doesn’t mean you’re pricing your product or service appropriately. Maybe your cost plus analysis results in a price of $125, but people are willing to pay $200 or $300 because of the value. In this case you are leaving money on the table.?Or a competitor comes along with a less expensive process and their cost-plus is only $110.

Value Based Pricing Strategy

With a?value-based?approach your price is based on the customer’s perception of value, what it is worth. If you’re selling a business service or product consider how much a customer will save or earn as a result of working with you or using your product.

Marketing Position

To define where you fit in the market, start with your competitors. What are they charging for the same product or service? Once you know where the rest of the market is, decide if you want to be a market leader, or follower. Leaders set the pricing at the top of the market. To successfully use this option you should have the best product available. If your product is average for the the market, playing it safe will put you firmly in the middle of the pack.?Or you can choose to be the low cost service provider. This is, however, a difficult position to maintain and you could end up in a price war, with your profits spiraling down as you try to defend that position long-term.

Capacity Based Pricing Strategy

One of my favorite approaches is capacity based pricing. In this pricing model your price?is based on the economics of supply and demand. It begins with an understanding of how units you can deliver. If you’re selling your time that is a limited resource. If you are consistently booked 30 – 35 hours a week you should raise your price. Conversely, if you have lots of free time, inventory in your warehouse, or capacity on your manufacturing machines a reduction in your price may be required.

Quantity Discount

The quantity discount is effective as you try to influence buyer behavior, encouraging people to come back and buy more of your product or service. For example, offering a discount for a full year contract or on multiple units purchased at the same time help lock in a customer. This is a win-win approach as the customer saves money you have lower selling costs because you don’t have to find a new customer for each one of those units.

Product bundle

This is a variation on the quantity discount. Instead of selling multiple units of one product, construct a product bundle which includes two or three related products. Bundled together the price is less than buying each of those units individually. As with the quantity discount, the customer saves money and you don’t need to find as many customers.

When should you raise your price?

Whichever strategy you choose, sooner or later you will need to raise your price. There is no simple answer to the question of when. But in my experience most small business owners under value their product or service, so occasionally evaluating and raising your price, is a good idea.

One good exercise is to look at your last 10 sales. If your price was 5% or 10% higher how many sales would you have lost to a competitor? If the answer is one or none, it is time for a price increase.

Let's look at the numbers

Let’s say you sell 10 units for $100 each. That $1,000 in revenue. If you raise your price 10% and lose one customer your total revenue is $990. When you the cost of producing the 10th unit you will probably roll more profit to your bottom line.?This is a simplified example, but do the math for your business and see if you like the results.

Your pricing drives your profits, so invest the time to price your products correctly.

Looking for more pricing and small business tips? Check out:

DigitalToolbox.Club for training and tools

More than a Few Words - A marketing podcast for business owners .