Becoming more profitable

The price is right – or is it? How to price your products

Knowing how to correctly price your products is one of the most difficult, yet critical, decisions your business must make. Price too high and you’ll limit your customer base. Price too low and you’ll limit your profits.

Determining a marketable value for your products is a delicate balance. Choosing the right pricing strategy strengthens your ability to achieve turnover and profit in line with your objectives.

How to set the right price for your products

It’s hard to overstate the importance of getting pricing right. Often customers’ perception of a product is formed as soon as they learn the price.

According to global management consulting firm McKinsey & Company, on average, a 1% price increase translates to an 8.7% increase in operating profits, assuming no loss of volume. Yet they estimate up to 30% of the thousands of pricing decisions companies make every year fail to deliver the best price. That’s a lot of lost revenue. 

Pricing is a key determinant in the customer’s decision-making process, and your challenge is to find the optimal price a customer is willing to pay. Ideally, you’ll factor in highly specific insights that would influence the price – for example, how much your target market will pay for your product, customers’ sensitivity or resistance to changes in price, and the cost of the next-best competitive product versus the value of the product to the customer – then arrive at the best price.

Researching your price position is key

 

There are a number of factors to consider in determining what price to charge for your products. These are best addressed by answering these questions:

  • What is the true cost of making and delivering your product?

  • What are current market prices?

  • Do you know who your competitors are, what they charge and how you compare on quality and service?

  • Who are your target customers? What value do they expect?

  • What you are offering? Are you a service provider or a discounter? 

  • What is your market positioning and competitive advantage?

  • What is the demand for your product? Is there an oversupply, or an undersupply?

Price too low and you’ll limit your profits.

 

 

 

Now you’re ready to determine your pricing strategy and tactics. Your considerations should include:

  • Market pricing – set this based on competitors' pricing and compete on value-added areas such as delivery or customer service.

  • Cost plus pricing – be careful the cost used as the basis to mark-up is one that ensures you cover all overheads.

  • Loss leader – pricing a product at a loss to attract customers to a higher margin product.

  • Psychological pricing – price on prestige and brand or ‘odd even’ pricing, for example $99 versus $100.

  • Price matching with competition, bricks and mortar or online.

  • Bundling – package or bundle products together into a one price deal.

  • Discounting – temporary or permanent promotions to clear obsolete or slow moving products.

These strategies can be used in isolation or together.

Improve your pricing performance

Price setting and then implementing the price you’ve set requires discipline. There is no luck involved, but rather a skill you need to develop. You can improve your pricing performance, provided you approach pricing in a structured way.

Once you have set your product price, you must monitor pricing and profitability, not just in holistic terms but by product – what is selling and what’s not, and at what prices? Which are making you money, or hitting your GP targets, and which aren’t? 

Some of the triggers to review pricing of a product are:

  • it’s not selling

  • you’re introducing a new product

  • your costs change

  • competitors increase or decrease prices

  • competitors introduce a new product

  • changes to industry or economy.

While the temptation to cut prices can be difficult to ignore, particularly in challenging environments, it can lead to undesirable results. Focus on marketing your strengths and price accordingly, even if it means an increase in prices. And don’t forget the mantra of “research, set, monitor and repeat”.

alt text of the image

Scott Brooks

Partner, Maxim Accounting and Business Advisors

With over 15 years' experience in accounting and financial service sectors, including international experience, Scott is motivated by developing strong relationships and providing comprehensive advice and quality service.

Found this useful?

Subscribe to our newsletter and receive the best business tips and articles straight to your inbox.

Thank you for signing up to our newsletter. You're one step closer to receiving more insightful information to help better your business.

We take your privacy seriously and by subscribing to our newsletter you agree to the terms of our Privacy Policy available below.