Pricing Your Products And Services Correctly

5th September, 2018 by

There are numerous factors which determine whether a business succeeds or fails, but pricing is often a crucial one. Without a decent profit margin, a firm cannot operate sustainably and will make a loss. Yet excessive markups are bound to deter customers, driving them into the welcoming arms of competitors. Striking a balance between consumer affordability and corporate profitability is difficult yet essential, particularly in terms of online marketing. After all, websites can’t impress people with smiling sales teams or well-stocked retail units.

Small business owners might be surprised to discover the sheer number of pricing models in existence. These include (but aren’t limited to) the following:

#1. Loss leaders.

The concept of deliberately losing money may seem counterintuitive, but it’s a great way to build long-term client relationships. Consider printers, for example – they’re sold cheaply because profits come from the ink sales, not the hardware itself.

#2. Cost pricing.

Again, a headline product at cost price might facilitate repeat custom. Supermarkets often promote certain products to entice people into their stores. At this point, impulse purchases (and the need to buy normal groceries) lead to further sales.

#3. Cost-plus.

Setting a margin or markup over and above the break-even point lets you market products affordably. Being able to undercut competitors is useful, providing the profit margin is adequate. Again, it’s a good way to win new clients.

#4. Competitive pricing.

Also known as copying (or slightly undercutting) rival pricing. In the same way that 99p stores fractionally outdo pound shops, this often attracts new customers, especially online, where price comparison sites and tables are rife.

Clearly, the break-even point is a vital factor when determining retail prices, or calculating profits. There are plenty of ways to drive down unit costs if your business involves the online marketing and sales of existing products:

#1. Buying in bulk.

Most wholesalers and retailers will offer significant discounts for large or repeat orders, representing per-unit savings.

#2. Importation.

Drop shipping companies actively welcome orders from the UK. Items tend to be low in value, but high volumes generate economies of scale.

#3. Long-term commitments.

If your business model revolves around a specific product or range, offer wholesalers and manufacturers long-term deals for per-item savings.

Of course, many small businesses market products they’ve made themselves. And as we evolve towards a service-based economy, more and more firms specialise in relatively intangible services like online marketing or PR. Establishing a pricing structure for these is more difficult since it often comes down to personal skills and perceptions of value among prospective clients. Some businesses may enjoy premium connotations or justify higher prices with better customer service. Even so, common sense and ingenuity are helpful in finding ways to set realistic prices, while minimising overheads and other costs:

Conduct market analysis.

What are your competitors doing? How are they pricing products or services in comparison to yours, and are these strategies proving successful? Read online reviews to determine customer sentiments regarding affordability and value for money. There’s no shame in appropriating successful ideas from rival brands.

Evaluate overheads.

Be realistic about every cost on the balance sheet. Try to consider the likelihood of returns and refunds, damage or wastage, discounts and sale prices. Salaried staff requires employers’ NI contributions and more, but who does their work when they’re sick or on holiday? Freelancers are more affordable but less dependable and biddable.

Don’t hide charges away.

We’ve all been on websites where the final online checkout page suddenly adds punitive charges for tax, postage or the loathsome “processing fee”. This is a leading cause of checkout abandonment, so don’t deceive customers with misleading headline prices. Be especially clear about postage to remote areas like the Scottish Highlands.

Explain your costs.

You don’t need to publish a spreadsheet outlining the percentage of each transaction that’s reinvested in online marketing, or phone bills. However, an FAQ page provides an ideal platform for outlining international postage fees or import taxes. Honesty is crucially important for online businesses, which could seem impersonal and anonymous.

Look for day-to-day cost savings.

The best way to lower prices is to lower costs. Could you reuse packaging materials received from suppliers in outgoing orders? Could you distribute documents and invoices by email instead of by first-class post? A good accountant may also suggest cost-saving ideas, helping to either increase profit margins or reduce sale prices.

Remain vigilant.

Many new businesses are set up with an acute awareness of market conditions, before gradually drifting out of touch. Regularly review competitor platforms for evidence of price changes. Are market leaders pricing products and services differently now, or more effectively? Has consumer demand evolved, and are wider economic factors at play?

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