Setting your price right

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One of the biggest issues that many businesses face is pricing. You need to price your products in such a way that you make an adequate profit, but you also can’t price yourself out of the market.

Known as the ‘pricing paradox’, many business owners default to discounting as a way to deal with the issue – they ask for a higher price, hope they get it, and discount when they don’t.

However, the risk of setting incorrect prices for your products and services can be reduced (or even eliminated) with the right information on hand. Pricing is really all about getting as much information as you can about three things:

  • Your market
  • Your customers
  • Your own internal numbers that drive your profit.

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Here are seven common pricing errors that you should avoid. Use this worksheet to determine if you are falling into this trap, and then use the solutions offered to develop your own pricing strategy.

Pricing strategy error / The problem in practice / A solution
Going in too low / Going in too low might be great for your top-line revenue number, but it’s terrible for your bottom-line, which is essential for you to survive. / Profit and price accordingly. You may lose business from price-conscious customers, but that’s okay. They will go to your competition – who will then have to figure out how to keep a healthy bottom line instead of you.
Using the same margin for all products / There’s no rule that says all products need the same margin. The reality is that slower moving items actually need higher profit margins. Why? Because you can afford a smaller margin on a high-sales volume item. / Set your margins according to the market, and then set larger margins for slow products. You should also find ways to add value, which will allow you to increase your margins - even incremental increases will make a big difference to your bottom line over time.
Not understanding the difference between mark-up and margin / Margins are based on sales prices. Mark-ups are based on costs. If you don’t understand the difference, you could offer a line of products with a 100% mark-up, and then have a 50% off sale. The result is that you end up selling the product at cost. / Make sure you always calculate both margins and mark-ups for all items. You need to ensure that you know exactly how much you are making on each product (after all costs are taken into account). This is the only way you can ensure that you reach your break-even point – and thereafter make a profit.
Not taking all costs into account / You can’t price a product correctly if you haven’t identified every cost. Everything adds up, including the % charged on credit card and processing fees. / Track the entire lifecycle of the product and all the peripheral services that go into getting that product to market – these are all business costs, and need to be taken into account when you are pricing your product.
Finding out what the competition charges and doing the same / This seems like a good pricing strategy – at least you are operating within industry norms. The problem is that you may be in the ‘accepted’ zone, but you also aren’t differentiating. Plus, if your competitor is under-cutting their own margins, you will just end up doing the same. / Instead of just following your competition, do a bit of research and uncover the true value that you offer your customers. Then price for that value. Now you’re in an excellent position to defend why your offering is worth its price.
Setting sales commissions based on sale prices vs % of profit / This is similar in scope to the margin/mark-up distinction. Commission based on the top-line vs the bottom line directly impacts profitability. Remember, profit is the only number that matters. Paying commissions out of revenue streams means you are giving away your company to your sales people. / Establish a realistic commission system that motivates and rewards sales people based on profit margins. This will also reign in sales people who are willing to offer hefty discounts just to make a deal.
Discounting instead of adding value / The reality is that discounting takes a toll on profits, even if you sell more product as a result. Let’s look at the following example: a 10% discount typically means that a business would need to sell 50% more products to keep the same profit on the bottom-line. In addition, costs often increase when you are discounting too much, particularly if you are selling more (but at a lower price) This means you can actually discount yourself out of business. / Instead of offering a discount, ask yourself if there is another way that you can add value to your product or service. A value-add means you are still giving away something, but it’s not coming out of your profits. Done right, it can also add to your customer’s experience, and great experiences are key to getting customers coming back for more – which in turn is key to a profitable business.

Resources:

  • Sugars, B. (2008). 7 Biggest Mistakes in Setting Prices. [online] Entrepreneur. Available at: [Accessed 11 May 2018].

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