Undoubtedly, every business person wants to know how to set a profitable price for their products and still turn out a high volume. Knowing how to price your products profitably is both a science and an art. Hence, on one hand, it has to be learned like a skill, on the other hand, there are methods you can employ to reach your destination as easily as possible. Don’t worry. By the time you’re done reading this article, you would be acquainted with both the science and art of setting the best price for your products in order to maximize profits.
Below are five steps to guide you in setting a profitable price for your products. Enjoy!
1. Understand the different pricing strategies.
The first pricing strategy we will consider is “cost-plus pricing”. Here you consider your cost of production including all overhead costs, then include a certain percentage that should bring in a reasonable profit. Afterward, you get a sum of these amounts, and voila! you have your selling price.
For example :
Cost of Labour: 50 dollars
Cost of materials: 70 dollars
Overhead cost: 40 dollars
Profit (30 percent): 48 dollars
Selling price:208 dollars.
A second pricing strategy is “Demand Pricing.” Here, the ideal ratio of volume and profit determines what you put out as your price. For instance, if you are a wholesaler, then you purchase products in large quantities. Hence your price is lower and your volume of sales higher which makes for a lot of profit. As a retailer, you cannot buy, stock, and sell in bulk, hence your price per unit of product should be higher if you’re going to make good profit. So you see, it involves considering volume and profit.
A third pricing strategy is “Value – based pricing”, where you consider how much your target customers are willing to pay for your products. So obviously, you’ve got to do some research, and ask customers what they think about your products or product as the case may be. Ask why they would be willing to get the product from you and not some other competitor. This way, you know just the right prices to set that would be profitable as well.
“Market-oriented pricing,” also known as a competition-based pricing strategy, contrasts comparable products in the market. So, depending on how closely your product matches up, you either sell higher or lower than your competitors. Below are the benefits of the different subsets of this pricing strategy.
When you price your products higher than the competition, you will be able to better position them as superior products with better functionality. Basically, this means it will be viewed by your target clients as a superior product and sell as such.
This entails selling your product for the sale price as your rivals. This helps you to maximize profits while remaining competitive.
Price Below Market
You can as well intentionally lower your prices below those of your competitors to draw customers to your store instead of theirs. However, do note that in the market-oriented strategy, each of the aforementioned tactics has drawbacks as well. Hence it’s crucial to understand what you want to achieve.
2. Experiment with Pricing
This is another method to know how to set a profitable price for your products. Asides from the pricing strategies talked about earlier, there are other pricing tactics that would be explored here. First, is “Discount pricing.” This tactic involves marking up products for sale at “made-up” prices which are higher, then making them available for purchase at a lower price to the consumer.
A second tactic is “loss-leader” pricing. With this, products are put up for sale at prices that are below the “break-even” prices–prices at which neither losses or profits are made. Hence, these prices would result in losses. This tactic helps to bring in lots of customers but you have to make sure that you have variety of products on display and there are others that are making maximum profits at the same time. You can, at this period choose to increase the price of your best seller, so overall, you’re not in debt.
The last tactic to be considered here, is the” Anchor pricing “, Steve Jobs once made use of this tactic to announce the official price of the IPad to a group of audience. Here, you first show the item’s” normal “price before reducing it subtly. You place both prices side – by – side to give the impression that you’re making losses and your customers are the ones winning.
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3. Focus on Long – term Business Profit
Yes, it’s good to use pricing strategies but take note that your strategy or combination of strategies must generate enough revenue to cover your overhead costs. And in addition, enough profit to fuel the inevitable business expansion.
Some overhead costs to take into account include:
- Costs of manufacturing
- Facility fees
- Employee salaries and related expenses
- Marketing expenses
- Professional charges, permits, or licenses
- Package charges, taxes amongst others.
It’s better to calculate your overhead costs on a monthly basis. This way, you will always have an accurate and current total. Which in turn, will enable you to set a profitable price for your products in light of your results.
4. Know Your Marketplace
In line with all that has been said already, you must know your marketplace, if you want to set a profitable price for your products. Knowing who you’re dealing with as regards your competitors as well as your audience will determine whether to keep prices high, low, or at par. If your business is small, or just starting out, you may want to sell at low prices, so you attract customers and make a high volume of sales.
If you want to sell at higher prices, you can choose to find out what your clients want that they’re not getting from others. In addition, you can find out as much as possible about your competitors’ products, so you can figure out a way to stand out.
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5. Revisit Your Prices Regularly
To set profitable prices for your products, you need to revisit your prices from time to time. Your prices can’t remain the same for long if you’re going to make progress in your business. This is because of the dynamic business environment which is influenced by the economic climate, and government policies, amongst others. This will obviously make sure your prices do not remain fixed for long.
However, whenever there is going to be an increase in your prices, do explain it to your customers so they don’t just assume you’ve become greedy. This way, they would continually consider the value they’re getting and not the prices. On a final note, always observe what your competitors are doing. If everyone is increasing their prices, there is no reason why yours should not.
To round this off, always stand your ground. Do not be intimidated into lowering your prices when that would not be good for your business. Also, do not be afraid to up your prices if you feel you’re giving your customers value for their money. “Own your prices.” Adios!
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