Even if you have the best product or service in the world, if your price is wrong, it could really hurt your business. If your price is too high, you won't get business; and if your price is too low, you won't make any profit. So, what is a business to do?
Obviously, the best solution is a balance. However, since finding that special pricing point is difficult, there are a few tips that could make the process easier. As pointed out in the above video, the best place to start is to look at your competition. See what their prices are and if they are basing their strategy on a particular area of your target market. Also, see what type of value they are providing.
Next, you should utilize your local resources, such as the Chamber of Commerce or other trade organizations. If your community has a pricing standard for your type of business, these resources would let you know about it.
Thirdly, obtain feedback from your customers. The only way to truly find out how your customers feel about your pricing structure is to ask them. You can do this by handing out surveys or by talking to them directly.
In addition, you should evaluate the supply and demand of your products or services. If you are selling a low-supply, high-demand product, chances are, you could charge a higher price than if you were selling a high-supply, low demand product.
Fifthly, conduct market research. The more you find out about your target market, the better you will be at providing their needs. If you conduct market research, you will know if you should broaden or narrow your focus.
Lastly, calculate your own costs. Before you can decide on a price for your offerings, you must consider business costs such as materials, labor, and transportation. Once these costs are covered, you need to make sure that you are also making a profit.
If all these steps are completed, you should have a good understanding for how your products and services need to be priced.
Is your pricing structure right for your business?
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Comments
Use Incremental/Variable Cost And Not Total Cost
All good points above.
Just to add that what is relevant in initial profitability measure and hence price determination, is a coverage of a business'/products' marginal cost which is the incremental cost/variable cost incurred in enabling its generation/production and not the total cost which includes fixed costs.
Fixed costs is not relevant in the short term but very crucial to be covered in the long term
Understanding this is crucial such that price can be placed at a level just enough to cover this marginal/variable cost with some profit element absorbed/included and no more.
Price determination based on this, will enable competitiveness with the assurance that the business costs are simultaneously covered.
Determining your pricing
It seems to me that there are two main ways in which the economist can contribute to the solution of the problem which I have been invited to introduce for discussion.
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