How to Create An Effective Pricing Strategy

What do you think is the most important aspect of a business? What is the reason that many businesses fail, while others survive and prosper – even though they may be in the same marketplace? It is how well the product is sold that decides whether the business will survive and prosper. And for selling effectively, the customer needs to know they are getting value for money – that they will not get what you are offering at a better price elsewhere. Success often boils down to how well the product is priced. The most common approach is to keep the lowest tab, even though it means slim profits, but that is not the only option. Let us see how we should price a product to create a win-win situation:

What are your competitors doing?

Don’t make the mistake of just seeing how much the other people are selling their wares at. Make a detailed observation of the complete package – what is included in the sale, what is not, value added services (such as Annual Maintenance Contracts, home delivery), target customers (whether they serve the rich or the middle class people), and so on. Pay close attention to what others are doing.

Fixed price or bargain?

Many small business owners make the mistake of selling their products and services at a fixed price at certain times, whilst allowing other customers to bargain and buy at a lower price than the one quoted at the beginning. You should have one strategy, and adhere to it. Otherwise, customers get confused and lose confidence in you.

Build exclusivity

Always try to explore different avenues to ensure that you have something to sell that no one else does. This has two benefits – One, you have a differentiator and customers are enticed to look up to you before they go to others. Two, if a price war emerges, you have the leverage of an additional offering that does not feature in the competition.

Conversion rate

How many customers who walk into your store (if you have one) actually purchase from you? Usually, if it is less than 10-12%, you should consider dropping the price by a few notches to make sure more people buy from you. The total sales will still be the same at the end of the day because of increased people buying; as far as profits are concerned, you cannot make a profit unless there is a sale, right? Besides, have a look around and see what the conversion rate of your competition is.

Identify your costs

Do a careful and conscious study of what your costs are. In most of the cases, the Pareto rule is true i.e. 20% of items will add up to 80% of costs. While the actual figures may vary in your case, the broad story still stays the same i.e. a small number of things will make up a large portion of your costs. So, identify these costs and see how they can be reduced. This will help you reduce your price point.

Add a value to your business

Customers are willing to pay more if they see some additional value in buying from you. This value can be anything – a long standing relationship; your store may be close to their homes; you offer home delivery at no charge; your shop is open for extended hours. Or online, you could provide free consultations, additional services or free products. So think and try to come up with some additional value that entices customers to come to you.

What are your customers willing to pay

Keep a track of how much your customers may have paid for what you sell. They will have a pattern e.g. an affluent customer is always willing to pay more than a middle class one. Was the profit margin you kept too high than is charged elsewhere in the market? Did they buy another but similar product from you at the same price? If yes, what could have tempted them to do that? Once you have made observations after a few days’ work, you will have the opportunity to revisit the prices and sell more.

Identify a missing price point in the market

Survey the market and see what the various price points are that are being charged for a single product. Then see if there is a gap between the lowest and the highest price points. If there is an opportunity there, focus your attention and try to identify how you can exploit that gap – bundle a couple of products, cross sell or upsell something related to the core offering, etc.

What do customers not want?

This is as important as identifying what they want in the first place. If you sell something that has a very low conversion ratio, or does not fit well into your broad business portfolio, then there is no point in keeping it with you. It is a high maintenance offering – it occupies space in your shop, you spend a lot of time in its up keeping, etc. – so, if there are slim chances of selling it, then exit that product. As you would realize, there is no one way that will tell you exactly what the price of a product should be. Similarly, you need to be constantly abreast of market developments to see what is driving the prices and flex accordingly.