Pricing a Product can be kind of tricky and may cost you more money than you invest into your business if it isn't done the right way, here are tips on how to price your products the right way to make your profit. -Via Inc.com
The two main Mistakes often made are Under Pricing and Over Pricing. You may already be making this mistake, take out your notebooks and pens and get ready to take notes that may save your business!
Under Pricing:
Pricing your products for too low a cost can have a disastrous impact on your bottom line, even though business owners often believe this is what they ought to do in a down economy. "Accurately pricing your product is critical at any point in the economic cycle but no more so than in a recession," says Laura Willett, a small business consultant and faculty member in the finance department at Bentley College in Waltham, Mass. "Many businesses mistakenly under price their products attempting to convince the consumer that their product is the least expensive alternative hoping to drive up volume; but more often than not it is simply perceived as 'cheap." Remember that consumers want to feel that they are getting their "moneys worth" and most are unwilling to purchase from a seller they believe to have less value, Willett says. Businesses also need to be very careful that they are fully covering their costs when pricing products. "Reducing prices to the point where you are giving away the product will not be in the firm's best interest long term," Willett says.
"The biggest mistake many businesses make is to believe that price alone drives sales. Your ability to sell is what drives sales and that means hiring the right sales people and adopting the right sales strategy. "The first thing you have to understand is the selling price is a function of your ability to sell and nothing else," says Lawrence L. Steinmetz, co-author Of How to Sell at Margins Higher Than Your Competitors"
Over Pricing:
On the flip side, overpricing a product can be just as detrimental since the buyer is always going to be looking at your competitors pricing, Willett says. Pricing beyond the customer's desire to pay can also decrease sales. Toftoy says one pitfall is that business people will be tempted to price too high right out of the gate- "Put yourself in the customer's shoes. What would be a fair price to you?"
Understand Your Other Business Priorities
You may want your product to be known for its quality, rather than just being the cheapest on the market. If so, you may want to price your product higher to reflect the quality. During a downturn, you may have other business priorities, such as sheer survival, so you may want to price your products to recoup enough to keep your company in business.
"The more you know about your customer, the better you'll be able to provide what they value and the more you'll be able to charge."
Know Your Costs
A fundamental tenet of pricing is that you need to cover your costs and then factor in a profit. That means you have to know how much your product costs. You also have to understand how much you need to mark up the product and how many you need to sell to turn a profit. Remember that the cost of a product is more than the literal cost of the item; it also includes overhead costs. Overhead costs may include fixed costs like shipping or stocking fees. You must include these costs in your estimate of the real cost of your product.
Many businesses either don't factor in all their costs and under price or literally factor in all their costs and expect to make a profit with one product and therefore overcharge. A good rule of thumb is to make a spread sheet of all the costs you need to cover every month, which might include the following:
- Your actual product costs, including labor and the costs of marketing and selling those products.
- All of the operating expenses necessary to own and operate the business.
- The costs associated with borrowing money (debt service costs).
- Your salary as the owner and/or manager of the business.
When to Raise Prices -- and How?
You should always be testing new prices, new offers, and new combinations of benefits and premiums to help you sell more of your product at a better price. Test new offers each month. Raise the price and offer a new and unique bonus or special service for the customer. Measure the increase or decrease in the volume of the product you sell and the total gross profit dollars you generate.
But there is a right way and a wrong way to raise prices. You don't want to alienate your existing customer base by raising prices too steeply, especially during a recession. "Rather than have a sudden increase, have a strategic plan during which you gradually increase your price 5 to 10 percent," Toftoy advices. "If the business is in trouble and you say, 'Hey, I'm going to mark everything up… that kind of scares people away. This way you haven't gone from $5 to $15. You've gone to $7.50 first."
When to Lower Prices -- and How?
You may realize that you have missed your target audience by pricing your products too high. You can always choose to discount your products or give customers something for free in order to get them to try your product or generate traffic to your storefront or website. "You have to get people in," Toftoy says. "People like getting something for free or some kind of discount. You can make Wednesday A "Blow Out Sale" day when customers get a 20 percent discount. Then maybe you can offer a student discount day. Then all you're doing is keeping the price the same, but to those people you're giving them a cut but it's not like you've lowered all prices."
Ex: This Sale by DOPE for their Grand Opening
Monitor Your Pricing!!
Another key component to pricing your product right is to continuously monitor your prices and your underlying profitability on a monthly basis. It's not enough to look at overall profitability of your company every month. You have to focus on the profitability (or lack of profitability) of every product you sell. You have to make absolutely sure you know the degree to which every product you sell is contributing to your goal of making money each month. Remember: "People respect what you inspect."
Here are some other practices to help you price right:
- Listen to your customers. Try to do this on a regular basis by getting feedback from customers about your pricing. Let them know you care about what they think.
- Keep an eye on your competitors. If you don't have deep pockets and can't afford to hire a market research team, hire some college students to go out on a regular basis and monitor what your competitors are doing.
- Have a budget action plan in place. Try to have a plan for your pricing that extends out three to six months in the future.
You owe it to yourself and to your business to be relentless in managing your product pricing. Remember, how you set the price of the products could be the difference between the success -- or failure -- of your business.
Article Rights to Inc.com
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