Pricing your product or service can be tricky sometimes. Your product price is directly responsible for the smooth running and success of your business, so you can’t afford to get it wrong. There are, however, many ways people go about pricing their product and this is where the confusion mostly sets in. Do you look at your competitors, your market or just your cost of production? The truth is you really have to take everything into consideration.
Deciding on a price for your product takes some time especially for new business owners. This is painfully true and interestingly enough a lot of people seem to just price their products on a whim. You have to remember that there is in fact an art and a science to it. So to help you along, we are going to take a look at some things to take note of before putting your pricing strategy in motion.
You need to understand your costs
One very key thing that you need to account for is that your product pricing has to make room for covering your costs and sill making you a profit. You need a full understanding of what it costs to produce one unit. This would let you know how much you need to sell to make a profit. This obviously means your price will be more than the exact cost of production, it will make overhead and costs of keeping your business up and running.
You need to know your customers
Knowing the spending power of your potential customers is also very important. A little bit of research into how much they spend on related products and competitors’ products can help you along. You also need to be careful about simply matching the prices of competitors, variations in your costs can mean your price leaves you short. It doesn’t hurt to test your products on potential customers to see how they respond to it.
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Know your competition
You should also take your competition into consideration. Taking a close look at how their product compares to yours could be really helpful. Try to find out what their cost of production is also and how they arrived at their pricing strategy. This will help you get a better sense of what your pricing strategy should be. In cases where they offer added value to their customers, you could try to do the same or even beat it to make your product more attractive.
Have an understanding of the market.
A good understanding of your market also goes a long way. The current state of the market largely determines what would be a smart choice for pricing. The structure of the market you plan to operate in gives you a window into the thinking of the competition and the consumer. Some business owners, after a bit of research, get some knowledge about the market shares of each competitor and what the perception of each brand is. Then go on to select a price.
Now that you have all this knowledge you can now go on to choose a pricing strategy that best suits you. There are a few popular strategies you could go with.
penetration – This is where you set a low price to increase sales and market share; thereby creating a space for your product. It is mostly used where the market is highly saturated(a lot of product option).
milking -Here you set an initial high price and then slowly lower the price to make the product available to a wider market, in turn getting milking profits from the market on different price layers.
premium – Here you set a high price to reflect the quality or exclusivity of the product; this is used when you have a high-class target audience.
competition – Simply setting a price that is comparable with the price of your competitors.
the product line – This is where you price different products within the same product range at different price points. This is used in an attempt to grab market share at the layers of the market.
bundle – Here you offer a group of products together at a reduced price.
psychological – You can also focus on the psychological side of pricing. For example; instead of pricing your product at N300, you could price it at N295.
optional – Adding more value to your product or putting in an extra product in an attempt to offset what your competitors are doing.
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Selecting a product price is something you have to get right on your very first try. There is very little room for error because once you select a certain price for your product, you can’t really go back. Setting your price too low might give you market share but it might also upset your profit margin. In some cases, it could give consumers the impression that your product is of low quality. In the same vein. if you price your product too high, consumers might not buy it at all. So study the different strategies, arm yourself with the necessary market information before choosing a price.