How to Make Sure the Price is Right

No one wants to sell themselves short nor overcharge. So exactly where should you land when deciding on the price of a product or service for your small business? The right pricing approach can increase profits margins and lead to market growth.

There are plenty of formulas to use, including penetration and surge pricing, but don’t rely on maths alone to identify the best price. Allow your pricing strategy to be influenced by a range of factors, including the following.

Target audience demographics

Know as much as possible about the customer you are targeting. Key demographic factors to research include their age bracket and gender, their location, income level, occupation and education.

Other factors that influence a customer’s product preference and buying behaviour include life experience, personal preferences and lifestyle. Studying these variables will help you identify how likely they are to purchase your product and how much they might be willing to pay. The clearer the picture of your customers, the more informed your pricing decisions will be.

In fact, an accurate customer picture will help you at all stages of the payment cycle. An Equifax SwiftCheck credit report, for example, provides an in-depth payment history of customers, allowing you to adjust payment terms for higher-risk customers.

Perceived value

Place yourself in your customer’s shoes and see your product or service through their eyes. Think about whether they would see a genuine need for it. Ask questions like: is it unique? Will it save time? Is it better than the competitors? Does it present as high quality?

Your customer’s perception of value has little to do with how much time, effort and cost you spent producing it. If you’re lucky, the perceived value is well above the production costs. This advantage can help guide your pricing. Your marketing efforts, including the copy and visual design, can help further improve the perceived value.

Tip!

Review your pricing, business expenses and customer demographics regularly and adjust your prices accordingly.

Cost

Add up your ‘direct’ costs, which is everything you spend on producing and delivering your product or service. Don’t forget to include expenses like packaging, credit card fees and storage.

Also, work out your fixed costs. These are costs like insurance, rent, salaries, utilities, superannuation, leave entitlements and Goods and Services Tax (GST) that stay the same regardless of whether your sales volume fluctuates.

With these costs tallied up, you can calculate your break-even point. The break-even is the number of sales you need to make before all your expenses are covered. It’s an important figure because you don’t want to find yourself in the situation where your sales are high, but you’re still making a loss.

Competition and demand

Competition and demand work hand-in-hand. Generally, the less competition, the higher the demand. And the greater the customer appeal, the more opportunity there is to up the price of your products and services.

Have a look at what your competitors are charging and what they include in the price. A competitor’s price might seem high, but it may contain additional value like excellent customer service and unique features.

Use your competitor’s pricing as an industry benchmark but don’t assume they have their pricing right.

Tip!

Use multiple price points. If you offer one thing at one price point, customers don’t have a reference from which they can compare pricing. By offering several packages, from discount to premium, you can increase the perceived value of your regular price. You can also find out which features customers are willing to pay more for, and which price points drive the highest conversions.

Market testing

There are various ways you can price test to gauge how much your customer is willing to pay for your product/service. Options include using discounts on your website to assess the effect of lower prices. Alternatively, an A/B testing tool to display different prices to different users. Or changing up the prices weekly or monthly to discover which outperforms the other.

Pricing objective

Decide on the goal you want to achieve with your pricing. It might be to maximise profit, to beat your competition, to increase the volume of your sales or to generate cash in the short run. The objective you choose will help dictate your pricing formula. For example, using margin pricing, you would start with the cost of your product and add on to it the amount of profit you want to make. However, if your pricing objective was to increase sales volume, this formula might have the adverse effect of pricing you out of the market.