By Phil Ellerby

Setting an effective and competitive pricing strategy is one of the most important decisions a business owner will ever make.

If the price is right, your business has the potential to thrive and grow. Get it wrong and your business could be destined for failure.

The reason for this is because pricing is the number one factor which has the biggest impact on improving profits. Basically, pricing can either make or break a business.

That’s why it is important to never accept the naïve equation which is much loved by salesmen that: Lower prices = Higher sales = Higher profits.

Yes, there may be times when lower prices will lead to higher profits, but it is not always true. With this in mind, it is important that any pricing strategy you adopt has been carefully researched to ensure that the maximum profit can be made.

What are the four main pricing strategies?

Pricing is one of the ‘Four Ps’ which make up the marketing mix – along with product, place and promotion – and each of the four main pricing models factors in cost, demand and competition.

Mark-up pricing: A price defined by adding a percentage to the wholesale cost of a product.

Demand pricing: Heavily determined by the relationship between profit and volume; whereby a smaller per-unit profit would be accepted if it leads to a significant increase in sales volume.

Competitive pricing: Charging a price which is directly comparable to other competitors who sell the exact same product or service.

Cost-plus pricing: A clearly defined profit margin is added to the total cost of a product, including overheads like materials and labour.

Why it’s always important to have more than one price

Because there are people who are always willing to pay more for what they perceive to be better products and services, it is vital that you know your market and customer base before choosing the right pricing strategy.

That’s why it is important NOT to have a single-price structure for the products or services you offer.

If you only have one selling price, it causes you to lose out in two different ways:

  • For some people that price is too high – so they don’t buy, and you lose them as a customer.
  • For other customers the price is too low – so you end up charging them less than they are willing to pay (and earning less profit), which means you lose out again.

Why are some people willing to pay more?

Many customers are reluctant to switch allegiances simply for the sake of a small percentage rise in price. This can be because of convenience, habit, concerns over quality or simply the ‘better the devil you know’ familiarity aspect.

If you don’t believe this, ask yourself: How often are you prepared to pay a little bit more for a product or service that you know, understand and are completely happy with?

Yes, customers care about prices – but they are not the ONLY thing they care about! Your business, and its marketing strategy, should use this to its advantage.

This is one reason why you should never compete on price alone and you should instead be making sure that what you offer exactly meets the need of your customers.

How can I charge a premium price?

If you want to charge a premium price or an amount that is above that of your competitors, you must clearly show and explain how your product is different from the competition.

To warrant a premium price, you must create an environment where customers feel as though they benefit in some other way – such as generous payment terms, extra features or superior customer service.

Helping to eliminate as much doubt as possible – by offering an extended warranty or guarantee – can help you charge a premium price and maximize your profits.

The three keys to offering best value are to make sure that:

  • Your products and services are exactly what your customers need and want – by offering the best and most appropriate combination of benefits
  • Your customers fully understand those benefits – because unless they understand what you have to offer is special, they’ll assume it is average, and you’ll only be able to charge an average price for it.
  • Your prices are presented in the best possible light – explaining the benefits and taking away any elements of doubt which may exist.

Get all of these little things right and even the most price-conscious customer will be happy to pay you more than ever before.

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