Simple Steps for Sales Pricing

Many businesses adopt a simple pricing strategy: They research the market, determine what the competition charges for similar products or services, and then meet or slightly under-cut those prices.

This strategy can be effective when the economy is booming; however, many customers make purchasing decisions based on considerations other than price. A lower-cost provider can struggle to attract customers concerned with more than pricing. Your pricing strategy may have to be modified to fit competition and economic changes in your market.

Getting Started

Before developing a pricing strategy, gather data and determine:

1. Current prices and pricing strategies used by competitors
2. How customers perceive the products and services they receive
3. The benefits of those products and services
4. The fixed costs you incur or will incur (overhead, rent, utilities, fixtures, etc.)
5. The variable costs you will incur (discretionary wages, product costs, fulfillment, etc.)

When you’ve gathered all your data, you should understand your business model, operating costs, and your market’s current pricing strategies and price points.

Next Steps

After developing a strategy, apply one of several pricing methods:

Cost-plus: Determine your production or product costs and apply a target profit margin. For example, if a product costs $20 to manufacture, and you wish to make a 20% profit, set your price at $24. If you aim to make 20% after all incurred costs, you must calculate these additional costs and increase the price.

Targeted return: Determine investment costs and then apply a targeted rate of return to deliver the return you require. For example, if you estimate investment costs at $100 per item and want a 20% return on investment, your price should be $120.

Value: Value pricing applies a price to the value customers receive. For example, if you are a business advisor and you can help a client determine a long-term marketing strategy, the value of that service is based on the value the customer receives. Value pricing is fairly subjective. The key is determining what value your customers will place on what they receive, not the value you assume the service will have.

Psychology: Psychological or emotional impact is used to determine final pricing. For example, customers may respond more positively to a product priced at $299 than at $300.

Then, layer in any other business strategies that could affect price. You may decide you need to adjust prices because you seek to:

Maximize current profits: Higher prices, at least in the short term, can help improve overall profit margins. (Be cautious. High prices may result in significantly fewer sales and reduce long-term revenue).

Maximize cash flow: Lower prices can increase overall revenue and boost cash flow, but often at the expense of profitability. (Once you lower prices, it is often difficult to raise them).

Maximize profit margins: Higher prices yield higher profit margins but could affect sales quantity.

Maximize sales quantity: Using product bundles to lower prices and offer discounts can increase the number of items sold. This strategy can increase your profit through supplier discounts for larger orders.

Further Your Strategy with Objectives

Pricing strategies should also be tied to company objectives. The following are common business goals and their effect on pricing:

Serve different market segments: One-size-fits-all prices can turn away customers at both ends of the demographic scale. For example, if you sell a maintenance service, a standard monthly fee of $85 may be too high for small customers and too low for customers who want additional services and faster response times. A standard approach may only be suitable for some customers. Building pricing tiers based on different service levels provides a more inclusive strategy.

Serve different market verticals: A company that sells individual products may also decide to sell bulk purchases to larger organizations. Different pricing strategies should consider volume sales, delivery costs, and other factors unique to servicing larger clients.

Generate new customers: Flat-fee pricing often generates additional customers, especially if a flat fee is perceived as cheaper than an a la carte purchase. Subscription and time-based purchase agreements are common ways of generating new customers. Typically, a business will develop pricing strategies to generate new customers at a low-profit margin and then seek to provide additional services for higher margin fees.

Create additional sales opportunities: Satisfied customers are a perfect place to look for additional sales opportunities. Tiered pricing systems for services and ancillary or complementary products are great ways to generate additional revenue per existing customer.

Minimize credit sales: Retail sales are cash or credit based on an up-front basis. Service businesses bill after at least some of those services have been provided. This requires the company to extend credit. Some businesses develop service plans that include up-front deposits or require up-front payments. For example, most cable companies charge for services ahead of service delivery. This approach allows your business to minimize payment risks.

Minimize barriers to purchase: Time-based pricing can make an initial purchase more attractive. This pricing tactic can be used in a variety of ways. This variable pricing approach is often used for products from television direct marketers: "Three easy payments of $49.95 each!"

That same tactic can be used for a service. A business could offer a service for a reduced rate during the first three months, charging a higher rate for subsequent months. Most companies that use this approach require a minimum time commitment longer than the "introductory" period. Other times, customers are told that their monthly service fee will increase at the end of the introductory pricing. Variable or introductory pricing’s goal is to reduce the resistance of new customers to make a purchase or commitment.

The best pricing strategies are flexible and allow a company to respond to changes in supply or demand, new competition, technological changes, and other market factors. Constantly evaluate and test your market strategies to maximize return on sales while meeting your operational and financial objectives.