Pricing is one of the most frustrating, stress-inducing, and confusing issues for new entrepreneurs to tackle, and it’s also one of the most important pieces of the success puzzle in entrepreneurship, so today we’ll look at a couple of strategies for figuring out how to price your offerings.
To start, take a look at your value proposition and your ideal customer. What message are you trying to convey? Do you intend to be the premium product option or are you trying to compete on price? It’s important to know where you will place yourself in the mix of your competitors. As a general rule, presenting your products as the luxury option will result in lower volume, but higher margins on what you do sell. Conversely, presenting yourself as the bargain option will lead to higher sales volume and lower margins. However, this only holds true if your full branding picture – and the product itself – match up. You can’t present your new restaurant as the premium option, price the dishes that way, and then serve frozen fish sticks; nor can you attempt to be the bargain option and only advertise in the Wall Street Journal. Look at the competitive landscape of pricing and then look at your value proposition and where you want to position yourself in that mix. If you’re the premium option, you need to be at the top of the price range among your competitors. If you’re the bargain option, you’d better be at a bargain price.
Also remember that you can affect where your products fall in the pricing mix – and, therefore, affect customers’ purchasing behavior – by manipulating how your own products are priced in relation to one another. One tactic is to give customers multiple pricing options for similar products. For example, there is a famous and often studied situation where a company produced a bread maker that simply wasn’t selling. Instead of pulling the bread maker off of the market, the company introduced another bread maker – with very similar features and benefits – at a higher price point. Once the new, more expensive bread maker was introduced, sales for the original bread maker increased drastically because customers all of a sudden saw it as a steal by comparison. If you have multiple product or service offerings, think about how to price them in relation to each other to encourage the purchasing behavior that you want from your customers.
Now that you have an idea of where you’d like to position your product(s) in terms of price, you have to double check that it’s doable given the realities of your company. Take a look at your costs to determine what you spend to produce what you have to offer. Clearly, this is more straight-forward for companies selling actual goods, but services companies need to be aware of the value of their time as they commit to projects at certain price points as well as the cost of the tools they’ll use to complete a project. Identify the cost of producing each unit of whatever you want to sell and compare that to the price you’d like to sell it for to find your gross margin. Then, don’t forget to keep fixed costs in mind so you’ll have a better picture of whether your pricing strategy actually fits with your operations.
If the ideal price point that you decided on based on your competitive and industry analysis just doesn’t mesh with the price you need based on your costs, then you may need to re-examine your business model. I wanted you to determine your ideal price positioning before looking at your costs and pricing needs for a reason: you have to be honest about where you should be pricing and that’s hard to do if you already know where you need to be pricing. If you start with the cold hard facts, it’s easy to let what you need in terms of pricing influence how you analyze the market, but if you do the market analysis first, you’ll have some more honest numbers to use in your analysis. Then, if you can’t make the pricing that works in the market work for the economics of your business, you may need to rethink what you’re doing.