Getting the price wrong for your products or services can damage your business. This applies whether you overprice or under-price – if you overprice you will lose sales and if you under-price you will lose profit. Here are six common mistakes that business owners make when pricing their products or services.
1. Getting the value question wrong
One of the ways to set the price for your products or services is to use a simple formula, i.e. cost of the product plus profit margin equals the price. However, even if you get the cost calculation correct and you build in a healthy profit margin, you might still get the pricing wrong. This is because you don’t take into account how your customers perceive value.
Obviously, you have to understand your customers to do this – you have to know what is important to them, why they buy your products or services, and why they choose your offering over a competitor. With this knowledge, you will have a better understanding of how customers value your products. You should then set a price that reflects this value.
2. Not looking at competitors’ prices
This is a simple one but there are many people who don’t look closely enough at what their competitors’ do with pricing. It should also be mentioned that you shouldn’t automatically price similarly or lower than you competitors. You can price higher, but you must know what they offer, how they price, and what makes your products or services different.
3. Not understanding costs
The basic calculation of working out prices based on costs and profit margin is mentioned above. Even though there are other considerations (such as how customers perceive value), it is still important you understand the cost side of the equation. Make sure you include all costs including the costs directly tied to the product (materials, time, manufacturing cost, etc), marketing costs, and the costs of running your business.
4. Not thinking about sales or business targets
It is also important to think about your sales and business targets. This is particularly important if you have a small number of products or services – the fewer you have, the more important it is that you sell the right number.
Questions you need to ask include is the market big enough for you to sell enough products or services to meet your targets based on your current prices.
5. Failing to review and monitor
It is good to offer your customers stability with pricing so they can plan and know what to expect. That said, you should still constantly review and monitor your strategy. You should regularly talk to customers to check your pricing policy is correct, review the competition, and look at the cost of producing the product or delivering the service.
6. Setting the price too low
Having the lowest price does not always mean you will get the sale. In fact, many studies show that customers will almost always pay a higher price when they believe they are getting value. Therefore, being the cheapest is a pricing strategy that is only suitable in some specific situations.
To get more help or advice with your business, including developing a pricing strategy, please contact a member of the Gilroy Gannon team today.