It certainly helps to build your business around a product or service that is in demand. But, a good product or service does not equate to money in the bank.
Correct pricing is at the heart of any successful business, whether you are selling your novel or offering accounting services.
Your pricing strategy will greatly impact on your bottom line and could mean the difference between thriving and merely surviving in business. Oftentimes, if you do not set your pricing correctly it can mean the end of the business.
Ultimately, the secret to a successful business is knowing how to price your products and services in relation to other important factors such as your overheads, competitors, target customers, economic conditions, industry realities and market trends.
Here are some insider tips that will help you price your products and services just right to remain competitive in the online marketplace.
Whether you are just setting up a new business or you have been in the game for a while, your online pricing strategy needs to be in alignment with the market segments you are targeting.
If you are targeting a large, mass market, you may have to contend with lower prices and compensate for this with higher sales volumes. On the contrary, targeting a niche market may allow you to ask for premium prices with the possibility of low sales volumes—can your business survive either of these strategies?
Smart business owners understand the importance of giving consumers just enough choices—not too few and not too many.
Providing different products at different price points allows you to leverage all potential customers across the entire market spectrum.
An effective pricing model that online entrepreneurs use is to group services into basic, standard and premium or a similar categorization model that lets you tap into all groups of potential customers.
Setting the ideal price for your products and services requires testing. The surest way to know what works for your customers and your business is to test the market using different price points, discounting and other pricing strategies.
For example, you could raise the price of a product and see how both your customers and competitors react. Alternatively, issue an offer such as a bundled price for related products or services and monitor their reaction as well.
Continuous testing will ensure that you are pricing neither too low nor too high.
If you want to build a successful business, the only direction your prices should be heading is upward. In most cases, lowering your prices or competing on price is not a sustainable strategy in the long term. In almost all industry sectors, there is always somebody who will offer a product or service for a cheaper price. It’s also often the case that the lower the price goes, the more substandard the product or service becomes.
Smart entrepreneurs understand that they will need to change their prices at some point in order to run a profitable, growth-oriented business. So, do not be afraid to revise prices upward; but you need to do this the right way.
Some rules of thumb to consider when thinking about changing your prices:
Follow your competitors’ cue- If they increase prices, this could be an indication that the market is open to a higher price for your product or services.
Follow your customers’ cue- When customers start associating your products and services with ‘cheap’ it could be time to increase prices slightly. Entrepreneurs use this strategy to reinforce the perceived value of their products or services.
Increase prices only gradually- Customers are generally not happy with price increases. When you need to raise prices, do so incrementally and only for a few products at a time. If you offer just one product or service, make small as opposed to earth-shattering, dramatic increases.
Successful entrepreneurs understand that pricing is often linked with consumer psychology. The way you market your product or service to consumers has implications on your pricing strategy.
When you market your product or service, you need to promote both its actual and perceived value/benefits. Often, customers pay for services and buy products based on the perceived value rather than on the “technical” benefits. It’s your job to correctly communicate those perceived benefits to the customer.
Your marketing strategy should firmly communicate the underlying value of a product or service—style, prestige, exclusivity, love, status, etc. When you combine this with the actual benefits of the product or service it can have a powerful effect in your marketing results.
It is common to see new online start-ups selling below the market price just to break even or to make very, very small profit margins
Is this a strategy you should ever pursue in your own business?
Such a pricing strategy is best used when you are just entering a market and you want to acquire customers using lower prices. But for this to work, customers have to perceive your product or service as valuable and not just a cheap, worthless product/service—remember nobody wants to buy ‘cheap’.
This takes us back to your marketing strategy and the importance of reinforcing the perceived benefits of your product or service, whether you choose to price below or at the market price
When done right, pricing below the market price lets you forego short-term profits as you build a long-term, sustainable customer base for your new venture. It’s obviously not a long term strategy but could work in the early days of your start-up.
Pricing your products and services
There is more to pricing than just factoring in the costs of production or service delivery. Pricing, more so in the expansive and competitive online marketplace, requires smart strategies and an understanding of your target market’s needs and preferences.