Before we go into the appropriate approach to set prices, let’s eliminate the idea that simple math like “Cost x 2” or “Cost plus X%” is the way to go. You aren’t selling your wares fairly if you utilize arbitrary equations like those. An enormous error is made when “cost” is used as part of the pricing equation. I realize this seems outlandish but consider this… Inquires, “Does your customer care what your cost is?” Clearly, “no” is the correct response.
The correct price may be much greater than your current price. Sometimes, business owners are ‘too close’ to the company. As a result, they have fixed beliefs about pricing based on their familiarity with the market and their competitors’ actions. Your newfound insight may be costing you money. Remember that your business’s price is not based on what you believe is fair but on what your customers are willing to pay. While your cost plays a significant role in determining your selling price, it is not the only thing to consider.
As the company’s owner, you must have a complete and thorough understanding of your expenses. This necessitates an understanding of both your direct and indirect costs. Overhead costs, trade discounts, seasonality, price breaks at higher quantities, etc., must be closely monitored. When it comes to money, you need to know everything there is to know.
To be even more precise, here. The selling price of each item must be known. This rules out merely averaging product prices across the board. You need to complete your research and examine each component of your cost of products. It’s possible (and likely) that your goods’ cost structure features some vast variations between individual items. Setting prices or determining expenses based on averages is a precarious business. When I was a kid, my father often said, “On average, you are quite comfortable if you put one hand in boiling water and the other in freezing water.” The lesson here is not to rely on the mean. You may go forward once you have an accurate accounting of your expenses.
How Clients See It:
It doesn’t matter if you think the prices should be higher or lower or if your employees, relatives, or competitors do. The only view that counts is that of the paying consumer. Customers “vote” with their dollars when they buy from you, essentially stating, “I think the price is fair considering the quality and service I receive.” They will not buy if they do not consider the pricing fair.
It would be best if you did more research on your customers by asking them questions about the value of the things they have purchased. The kind of inquiries go something like, “Did you have any idea of a price range you were hoping to see when you came into the store?” After you hear their response, probe further to determine how much they will pay at the extremes. While most business owners look at the extreme end of client expectations, you should also consider the minimum. Your product is priced too low if it is less expensive than customers would anticipate it to be. The buyer claims they would have paid more if given the chance. You need only become adept at client listening.
The next step is determining what other needs the product will fulfill for the clients. Do they anticipate receiving a warranty, post-sale service, or something else?
You may move forward with confidence now that you have a firm grasp on both your costs and the expectations of your target market. As for the next phase, it has nothing to do with deciding on a price. You should not proceed with it just yet. Remember that “forgetting about your competition and how prices are set within your industry” will be a massive challenge for you. It’s time to stop trying to think exactly like everyone else in your field. You will never succeed where they have failed if you continue to adopt their mindset. I am not an expert in your area, but I would wager that the industry frontrunner does things differently than the rest of the pack. They were/are much more resourceful when it comes to going above and above for their customers.
Put aside what you ‘know’ for a moment. Use a pricing structure from a different market as a constraint. You might not understand it but try not to be too dismissive. What if you priced your goods like airlines did and offered a loyalty program for regular customers? What if you provided away your product (as they do with cell phones) and made the customer sign a long-term contract, much like the cellular business? The casinos in Las Vegas are making a ton of money by giving out free hotel stays and plane tickets to potential customers.
The goal is not to mimic other industries’ pricing structures word for word but to train oneself to think, “How can I apply that kind of pricing concept to my business?” Ask yourself, “How can I apply that technique, or a variation of it, to my business?” if you learn of or encounter a company employing a pricing strategy that differs from yours. With that forward-thinking, you’ll quickly rise to the top of your field. Profits Can Be Increased With Good Pricing, the subject of my upcoming pricing article.
H.R. Smith has worked as a business owner and educator for almost a decade. Creating a profitable internet business model while writing online content; building a brick-and-mortar business. His author wife’s latest work is the post-apocalyptic The Troop of Shadows Chronicles.
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