Free Advice - Pricing
The stuff of nightmares right? Many company's just look around for the cheapest competitor and match them.
Pricing has a bed fellow, they are very closely linked and they team up to get people to pay more than bare minimum. They are the reason we don't all drive around in the cheapest car available and the reason there are different classes of ticket on many forms of transport.
Price and Value
When you buy a car you choose a brand, a manufacturer and you then choose which model you want. After that there are a range of options you may add.
Each choice you make is based on the value you place on something. You may want satellite navigation but be unwilling to pay the cost of the built-in version. You may want fancy 18" alloy wheels but you are not willing to pay hundreds extra for them.
For your own products you need to set a price that reflects the value the customer will get. If you have features above the basic products available from others then you have to figure out how much people will pay for those extras. You also have to figure out how to explain your features in terms the customer will be interested in.
The Price Line
Here is a mechanism to help you find the right price for your product or service.
Break-even - The price per unit that covers all the costs you put into making, packaging, promoting and whatever else went into the product. You will need to apportion some of the running costs of your operation to the product as well. If it is the only product or service then you have to throw everything into the equation and then divide by the number you expect to sell.
Maximum - Do some research into your competitors and find the highest price being paid for a comparable product.
Penetration - This is set towards the low end of the price line in the hope that low profits will help move larger volumes of the product. The dangers include,
- Difficulty in raising the price at some point in the future once customer price expectations have been set,
- Price competition brings the market price down for all products as they try to compete,
- Not making enough profit to run a sustainable business
Skimming - Setting your price close to the maximum in an attempt to recover development or start-up costs as quickly as possible. Often used when there is little competition and a company wants to milk the market before others move in.
Sustaining - Charging a fair, middle of the road price that will attract the majority of the target market, makes sufficient profits to keep the business viable and allows product promotion to maintain or grow market share.
If you have a product that can be sold in several forms, each with a different price or that has optional extras, then you may choose to have a low entry level price to entice people in and then offer upgrades that can make the sale significantly more profitable.
Costa has this game pretty well sown up, other coffee chains follow a similar pattern but here is the Costa system.
- Latte please
- Medium or large? (no mention of small) (10%-20% upsell)
- Extra shot? (another 20%)
- Any cakes or pastries today? (can easily double the sale value)
- Do you have one of these loyalty cards? (encouraging repeat visits)
Whatever your product or service you need to work out what can be sold with it and how best to make that offer. You can significantly increase your turnover just by maximising every sale and it is easier to do that than hunt for new customers to sell to.
Price setting is a key part of getting your product to the customer, too cheap and you are losing money, too expensive and they will buy elsewhere. Use a value proposition to make your price setting effective.
If you are in the home counties we can provide consultancy and training services to help you get ahead of the competition.