One major decision that you have to take as a business owner is determining the appropriate price for your products and services. The first thought is to determine if there is any such thing as an appropriate price – what makes one price more appropriate than the other.
Our experience shows that what business owners must aim to do is to fix prices that represent good value for their efforts, prices that will be accepted by the market, and prices that will ensure your survival as a business. There are a number of different ways of identifying the most appropriate price for your products and services, and we will discuss them briefly:
#1: Cost Plus:
As a business owner, you may set a specific profit margin on any product or service that you offer. Your pricing will therefore be a function of identifying what the cost of producing each unit of your product and the additional mark-up to reflect your profit margin.
So, let us say for example that you sum up all the costs of printing a book and it comes to about N1,000, if you have a profit margin of 50%, the price of your book will be N1,000 + (50% of N1,000) = N1,500.
The important thing about using this methodology is ensuring that you have calculated your costs properly and that the profit margin you have set compensates you adequately and will be accepted by the market. The cost-plus is a great place to start from, and may be combined with other approaches that we will discuss.
#2: Price Discovery:
When you have calculated the cost –plus price of your products you can test for market acceptance through price discovery. Launch your product into the market and try attracting customers at that price. The feedback you will get from the market will help you determine the most appropriate price for your product.
Based on the price that the market seems willing to pay for your product, you are left with a number of strategic choices including – 1) to minimize/reduce your cost of production, 2) to reduce the profit margin, 3) to enhance your product to create more value for potential buyers/users, 4) to maintain your price or 5) to increase your price if you believe the market will accept a higher price.
Price discovery makes conversations about pricing to be more realistic- since without willing and effective buyers for your products, your price and all the magical formulas you have built up to arrive at it would all be a colossal waste.
#3: Competitive Pricing:
With pricing you cannot go wrong with getting a feelof what your competition is doing. Depending on the value you perceive that the market will place on your products, the price of similar products or services in the market place is a good place to start.
So, if your strategy is to be a price-leader and offer your services and products at a significant discount to the competitors, you can set your price based on a survey of your competitors and the appropriate discount.
Also, if you are offering a niche product, you can evaluate the prices your competitors are offering and place a premium on it to adjust for the added value that your niche product offers. Referencing your prices from the competition is also another way of ensuring that your prices are realistic.
To do this you must ensure that you have selected the correct peers from among your competitors to use as a benchmark, so that you will not be “shooting yourself in your foot” or pricing yourself beyond your realities.
When using this approach you should also plan to carry out periodic competition or market surveys so that your pricing continues to remain realistic, and in line with your benchmarks for your competition.
#4: Negotiated Pricing:
Finally, another great way of setting prices for your products and services is through negotiation. Using your cost-plus prices as anchor you can negotiate the price of your services to a potential customer.
The negotiated price – where both your needs are satisfied will then determine the price of that product or service. In the world of professional services (law, accounting, advisory, etc.), negotiated pricing is quite common.
Negotiated prices may then be used as a benchmark for future pricing with other clients or to even set a fixed price or a reference price. Negotiated pricing can be a difficult way of setting prices, but depending on the nature of your business, it may be the most acceptable way to arrive at prices.