One of the most important decisions your business can make is setting your prices.
If the prices are too low, sales might rise but your profits and income will likely suffer.
Alternatively, if the client thinks your prices are too high, they may go to a competitor. Or even find a substitute product or service -- skipping your product or service category altogether.
Either way, your sales, profits and income suffer.
Locating the right pricing structure is a crucial step in the overall strategy.
How do you decide how much to price for a product or service?
When deciding upon what price to charge your customers, most providers pick a number based on what they think they are worth, whether that is $15 an hour or $1,000.
They are focused on just one factor -- their own goals.
If the market was only concerned with your personal goals, setting prices would be easy -- Just set your income needs and get to work!
But your goal is only part of the pricing equation.
The other critical factor is identifying what is most important to the customer.
And this complicates your pricing strategy.
This is why the price you charge your customer come from two main objectives:
1. Your marketing parameters -- what the market is willing to pay, and
2. Your goals.
Armed with these big picture objectives, there are four common best pricing practices that great business people consider when developing their pricing strategy into their overall marketing mix.
The importance and objectives of pricing are:
- To achieve a target return on investment -- Another way to say this: How much money do you want to make? If your goal is to earn $2,000 in income from serving clients then you have a starting point and can begin to set benchmarks to build your pricing strategy.
- To stabilize your price and margin -- You want to strive for a balance where your prices are demanded by the market and you have adequate profit margin to maintain your business. This means, your costs are kept low enough to be able to have a large enough profit margin that enables you to pay for ongoing costs such as website costs, advertising, auto and gasoline, materials, communications, office supplies, etc. Remember not all sales revenue is earned income. A percentage needs to go towards keeping your business strong, healthy and future focused while meeting today's needs.
- To gain a target market share -- If there are 30,000 potential customers in your target market as defined by your demographic research, and your initial marketing plan targets 10% of this market (30,000 X 0.10 = 3,000), then you want as much of the 3,000 in your market share as you can gain. Your marketing plan will be designed around regularly communicating value to this target market so you can reach your goal. For more on this, see our Guide to Market Research, and the free Sales and Marketing Forecast Model (Google Spreadsheets).
- To meet or prevent competition -- As mentioned earlier, if your prices are very low, you can gain an increase in market share by taking business away from your competitors. But you run the risk of running yourself out of business due to a slim-to-none profit margin. If your goal is to meet or prevent competition then your pricing strategy should be in line with what your competitors are charging for a comparable service. To prevent competition, this will require you to deliver more value and aggressively communicate regularly with your target market using our Email Marketing strategy and Direct Mail Marketing, and an optimal price point.
For some great pricing strategies, be sure to check out our tutorial: 3 sneaky ‘psychological pricing tricks’ used by businesses to increase sales.
About Your Strategic Marketing Partner
Sam Hirschberg, MBA, is Your Strategic Marketing Partner in Arizona. Always professional and a delight to work with, Sam is not your typical “marketing consultant”. Unlike most consultants who tell you there is a problem and say, “See you later and good luck!” Your Strategic Marketing Partner knows how to find solutions, execute programs, test and measure campaigns, and how-and-when it’s time to roll-out big! You are invited to call (602) 892-0777 to learn more about Sam’s background on his FREE 9-minute recorded message. For more information about Sam, please visit https://strategicmarketingpartner.com.