Most entrepreneurs and early-stage founders will agree that working out the ideal pricing is one of the trickiest aspects of doing business.
The need to get it right usually comes with a lot of pressure, as it has the most impact on revenue.
Pricing alone can spell success or failure for start-ups, and this reality makes things even more complex and confusing.
On the one hand, the fear is that customers may be less likely to pay for highly-priced goods or services; on the other, businesses struggle to be profitable when the pricing is too low and can be deemed low value.
So, what must you do to find the pricing sweet spot?
Understanding Your Cost Structure
Your cost structure is all the expenses your business incurs to remain operational.
Knowing your cost structure will help you price your product/service correctly, ensuring you do not lose profits by pricing without covering your costs.
Calculating your cost structure, is pretty straightforward:
- Create a list of all your business expenses.
- Add up all those costs to find the total cost of running your business.
Once you have the total costs, you can then consider how much you will need or want to charge for your individual products/services. The key is to ensure that your price is high enough to cover your costs and make a profit but not so high that no one will buy from you.
Working out your cost structure is the first step to getting your pricing right. So take all the time you need to figure it out.
Choosing a Pricing Strategy
There are several ways to price for success and growth. Below are some of the most common strategies.
Calculate your costs, add a markup, and that’s your price. Cost-plus pricing is perfect for businesses that incur operational costs regularly.
This is based on what the customer thinks your product or service is worth. It is ideal for businesses with unique offerings.
It is when you price your products/services low to gain market share, then gradually raise prices as your business grows.
This pricing strategy adjusts with market demand and supply. It is ideal for industries with fluctuating demand.
With this strategy, you price high to convey quality and exclusivity. Ideal if you provide high-end products and services.
Whichever pricing strategy you choose should always reflect the nature of your business and the market.
Testing and Adjusting Pricing
Price testing is a process that allows you to ascertain the relationship between sales and price change. You can use it to measure demand elasticity (a fancy way to describe how customers respond to different price points). Why is this important? Good question. With popular products or services, there’s a ton of available historical data or trends to reference as you work out your pricing.
But bringing something new to the market means you won’t have much in the way of reference to base your pricing on. In this case, an ideal strategy is to implement a price testing phase where you roll out products/services among a small group of customers. How your test group responds to your pricing will let you know whether or not you need to make adjustments.
Changing Market Conditions
Another detail to note is that a pricing strategy that works today might not work tomorrow, as the market is dynamic. Several conditions that can affect your pricing will continue to change.
One effective way to maintain your competitive edge in the face of such changes is to adjust your pricing accordingly.
While this provides a solid overview of how testing and adjusting pricing works, the actual process typically involves a lot of planning and precise execution. We advise consulting an expert before embarking on the process.
There is no perfect price. So, don’t let the idea of finding one consume you. In reality, pricing has more to do with what works sustainably and less with what feels right or perfect.
Your goal should be to land on a pricing strategy that works for you and your ideal customer, giving your business the best chance of growth and long-term success.
Take the process one step at a time, and always remember that Be The Boss is here to help with all your business growth needs.