Pricing your product or service is one of the biggest decisions you must make as a business owner. Finding the right pricing strategy could make or break your company.
So, rather than pulling a number out of thin air, it’s important to consider everything – from cost of goods to customer demand and brand perception.
The modern customer knows exactly what they want to buy, and how much they’re willing to pay for it.
Anyone can open their browser and compare offers before making a purchase. We all want to get the most for our money.
How can you price your product to maximize profits while attracting the right clients?
Pricing strategies in business are a great opportunity for you to test the waters. Using all the data available to you, you can create a price that works for you and your customer.
Read on to learn how to price your products and some of the best pricing strategies to use to grow your business fast.
Pricing Strategies in Business: An Overview
If you want to scale your business successfully, you need to have a range of pricing tactics up your sleeve. You won’t always find the perfect price for your product or service immediately. This is why it’s a good idea to understand different pricing techniques businesses can use.
What Is A Pricing Strategy?
A pricing strategy allows you to find the quantitative value of your product. It considers customer demand, profit margins, perceived value, and cash flow. With this, you can choose an appropriate pricing strategy guide for your business.
Different product strategies work for different industries. SaaS businesses may use subscription-based pricing, which wouldn’t work for single-use product companies.
Why Does The Right Pricing Matter?
It comes down to this:
Set your prices too high, and you’ll deter your core customer base.
But, set them too low, and you’ll miss out on profits.
A low price might also deter customers, as they may assume your product is of poor quality.
Finding a pricing strategy that works for you, your customer, and your brand perception is crucial. As you scale your business, you’ll learn that there’s a lot more than buying stock or providing services to account for in your pricing strategy.
All this extra stuff takes money out of your bottom line. You want to find a pricing strategy that allows you to continue making a healthy profit even when operational costs increase.
Things To Consider Before Pricing Your Product/Service
No matter what pricing models you end up choosing, you should always consider these three things:
1. Variable Costs Per Product
If you’re a drop shipper, or someone who orders your products to sell, pricing your products is much easier. You’ll already know how much each product costs you to buy. This is known as the cost of goods sold.
But this isn’t the price you’ll sell the product at. You also need to account for variable costs. These include the packaging, shipping, and any taxes you might need to pay on top of the cost of goods sold.
If you make your products, you’ll need to include the costs of labor, raw materials, shipping, and taxes. If you’re a ceramicist and buy clay in bulk, how many products can you make from a single pack? When calculating costs, you’ll need to divide each item into how many products you make from each batch of raw materials.
One thing people often forget to incorporate into their costs is the value of their time. How long does it take for you actually to make your product? How much do you pay your staff to make the product? To calculate this, create an hourly rate and divide the time by the number of products you can make.
Put together the costs of goods, marketing, packaging, promotional materials, shipping, etc.
This is how much your product costs to sell.
2. Profit Margin
No pricing strategy is complete without incorporating a profit. Once you’ve calculated the variable costs per product, you need to consider how much profit you’d like to make. You want to make as much profit as possible without pricing yourself out of the market.
3. Fixed Costs
Fixed costs are the expenses you pay whether you sell a product or not. For example, workshop rent, licenses, permits, and programs or systems you need to operate. You want a pricing strategy that covers these costs while making you a profit.
Take your variable costs and profit margins and see how many products you need to sell to break even. Then, play around with the numbers to gauge an ‘acceptable’ price for your customer.
Our Tips For Finding The Perfect Pricing Strategy
Once you’ve calculated the actual cost of your product and how many you would need to sell, it’s time to consider other factors of pricing: Customer perception, competitors, service value, etc.
Below, we’ve listed our top tips for pricing a product or service.
Whoever Can Pay The Most Wins
There’s one cost that almost every new business owner forgets to account for: Cost per acquisition.
Cost per acquisition is how much it costs to win a customer. Winning customers is usually done through paid marketing or promotions. However much you spend to get a single customer needs adding to your pricing strategy. Otherwise, your profits will sink.
This is particularly important for when you start to scale. When scaling your business, the cost per acquisition will likely increase. You’ll either need to increase your prices as you go along or find a starting price that accounts for this eventual increase.
Example:
You’re offering a service for $500. The price is in line with your competitors, customers are happy to pay it, and you’re making a nice profit. But then your leads run dry, and you’re depending on paid marketing for lead generation.
The more money you’re putting into marketing, the less you’re making on each closed deal. That healthy profit you made from $500 gets eaten away while trying to find new customers.
On the flip side, someone offers the same service for $1000. Once their initial leads dry up, they have more profit margin to play around with. They can put almost double your amount into paid advertising and still generate a good profit. This means they’ll make more money and be able to steal potential customers from you.
You’ll find that whoever can pay the most for their lead generation will win the customer. While $500 feels like an attractive price in the beginning, it quickly becomes a problem.
Understand Product & Service Cost
As mentioned above, the pricing strategy of a product or service needs to incorporate every expense incurred. People often forget to include taxes, employee wages, and inventory storage costs. All this needs to be paid for somehow. And the easiest way is to ensure it’s all absorbed into your pricing models.
When you start to scale your business, you will need to hire more staff, store more products, and pay more taxes. Your pricing strategies must be flexible enough to take on all these new costs. If you want to scale from the get-go, price your product or service higher so you can account for these costs straight away.
Understand Product & Service Value
The cost and value of a product are entirely different. Costume jewelry using only the highest quality materials is still only costume jewelry. This means you can only price your product within a specific price range.
Nobody would buy a $30 plastic toothbrush if they could get the same product for $2.
The perceived value of a product is something to consider seriously when creating pricing strategies for your business.
Marketing will play a major role in perceived value. Brand awareness and perception can turn your product from a budget buy into a luxury bargain.
Think about how much your product adds value and how much your target audience will likely want to spend.
Test Don’t Guess
Why guess when you can test different types of pricing strategies? Test different pricing techniques over a month or two to find the best option for your target market.
Example:
You set the price of your service at $2000. You know the customer is getting a great deal for their money; you cover all your costs and make a nice profit. You trial this price for the first 60 days and close 20% of your deals with potential clients on the phone.
This shows $2000 is a good price and a price people are okay paying. But is it the right price?
For the next 60 days, you change the price of your service to $4000. A massive increase in profits for you, and there’s a higher perceived value of the product. Over the next two months, you close 24% of deals.
Testing has allowed you to double the price of your service, close more deals and make more money. Not every test will be as successful, but it’s good to experiment and test boundaries.
Bonus Tip – Don’t Base Your Pricing On Word Of Mouth
This might feel like an obvious tip, but we’re all guilty of allowing other people’s opinions to sway our decisions. If you’re launching a product-based store, don’t ask your family and friends how much they’d be willing to pay.
There’s so much data and testing available out there. It would be silly to base your pricing on the opinions of a few people. These few people may not even be your target audience.
While testing and calculating all your costs may feel like a tedious job, it really does work. You can jump onto Shopify today, pop in some products, and get selling. But this strategy (or lack thereof) will quickly lead you to run your business in the red.
Types of Pricing Strategies With Examples
Many pricing strategies in business work for different industries. Experiment with these tried and tested pricing models to find the right one to attract your customers.
Price Skimming
Price Skimming is ideal for tech products and new services. Products are priced at the highest possible price to start with, then discounted as it becomes less popular.
The best example is DVD and VHS players. Both were high-ticket products in their day, but as time goes on, you can find them for much cheaper. Manufacturers of these products will lower the prices to help recover any sunk costs incurred.
If done correctly, price skimming can work well, but for the most part, it annoys customers. Nobody wants to pay for a product only to find it’s cheaper a few months later.
Price skimming can also alert your competitors. They’ll quickly see that your cost prices and profits aren’t quite in line and will price you out of the market.
Market Penetration Pricing
If you’re trying to break into an existing market, market penetration pricing is ideal. But only short term. Prices are set super low to draw in potential customers. Once you’ve locked in customers, the hope is that they’ll then be willing to pay a higher price later. Almost like try-before-you-buy.
If you’re offering the right product, there should be no issue with increasing the prices bit by bit. Otherwise, this pricing strategy isn’t sustainable.
Premium Pricing
Premium pricing is sometimes known as luxury or prestige pricing. And it’s all about brand perception. It’s why designer brands can charge such high prices.
Premium pricing creates a sense of luxury, exclusivity, or premium quality. Rather than totaling up how much the product actually costs to make and sell, margins are added to create a premium feel.
Again, marketing will play a big role in this. It may be that you only release a small amount of stock at a time to create demand and exclusivity. Examples include Tesla, Omega, and Chanel. In 2021, Tesla boosted their brand value by 184% through their premium brand perception.
Economy Pricing
Economy pricing is a strategy that targets customers who want to save as much as they can. You sell products in bulk, with the idea that a customer can save by buying more.
It works if you have large quantities of stock to sell, like Costco and Walmart.
Bundle Pricing
Bundling products is a simple pricing tactic that’s perfect for cross-selling to customers. An example would be buying home and car insurance in a deal or subscribing to a tv and broadband bundle.
This pricing strategy allows you to put two or more products and services into a bundle for a single price. It adds more value for repeat customers and those willing to pay more upfront. It also allows you to sell more products than you otherwise would have.
Value-based Pricing
Value-based pricing strategies in business are based on how much a customer is willing to pay. Sometimes, brands charge less for a product, even if they could charge more. This can be helpful for anyone that needs to boost customer loyalty.
Value-based pricing is based on customer interest. For this strategy to work, you’ll need to be fully in tune with your customer and the buying personas you’re targeting.
Theatres and music venues use value-based pricing. Some customers want to visit the theatre but can’t afford to pay for premium seats. Instead, they’d be willing to pay less for a seat at the back.
Dynamic Pricing
Dynamic pricing is also known as surge, demand, or time-based pricing. This pricing strategy is commonly used in the hospitality and utilities industries.
A dynamic pricing model has flexible pricing, which fluctuates depending on demand:
- Holidays are more expensive if you have to go during the school holidays
- Hotels typically tend to be more expensive the nearer to the time you want to check in.
- Tickets to a sports game are cheaper far in advance. And they’re even more expensive if you pay on the door.
- Prices change depending on how many people look for that product or service.
Dynamic pricing is a great pricing strategy. It allows you to create a pricing guide for the year and manage marketing accordingly. A travel agent can plan discounts and promotions and put more marketing budget behind their offers during peak time.
The strategy also allows you to A/B test different promotions in real-time, all while maximizing profits.
What Pricing Strategy To Use For Maximum Profit?
To find the right pricing strategy, you need to test the pricing potential based on your market. What are your competitors offering, and how much are customers already willing to pay?
You also want to consider your buyer personas. Are you ticking all their pain points? How are you calculating customer lifetime value? What can your customer afford?
There’s no one-size-fits-all approach to find a pricing strategy that promises maximum profit. Experimenting with different pricing strategies will help you check out the best option for you.
Pricing Strategies in Business: FAQ
How do you maximize the price of a product?
To maximize the price of a product, you first need to look at all the costs incurred to sell it. This includes raw materials, shipping, tax, employee pay, and marketing. Using the total, you can look at competitors and factor in the profit margin you want to work with.
For scalability, add a larger profit margin onto your price, so you can start paying for marketing and lead generation. Maximizing the price of your product requires testing. Offer the product at a lower and higher price and find the middle ground that customers are willing to pay.
What 3 strategies are used for pricing products?
There are three main things to account for: Variable costs per product, fixed prices, and profit margins. Variable costs per product are all the costs incurred to make and sell the product. This includes the materials, the packaging, and the marketing.
Then there are fixed costs like office rent, employee pay, and taxes which have to be paid even if you don’t sell a product. Your price needs to allow you to break even once all these things have been paid for. Lastly, there’s how much profit you’d like to make.
Add all this together, and you have the price of your product!
What strategies do companies use to price their products to satisfy customers?
Companies use different pricing strategies to price their products at a price that customers are willing to pay. Some of the top pricing strategies are value-based pricing, premium pricing, and dynamic pricing.
Wrapping Up: Your Pricing Strategy Guide
As a business, you want to maximize profits without pricing yourself out of the market. By using the pricing techniques mentioned in this post, you can test to find something that works for your company.
The key to success is ensuring that your prices allow you to scale your business. Get the pricing right now, and you’ll save time and money in the long run. If you find yourself having to increase prices to help your business scale, you’ll annoy customers and have to invest more in new lead generation.
Instead, work with Scaling With Systems to ensure you have a consistent customer base to test your pricing strategies with. The more leads you have, the more chance you have to test, and the more you’ll learn about how much your customer is willing to pay. Book your free consultation call today, and one of our expert team will get back to you as soon as possible.
