Pricing Strategy – How to Price a Product to Generate More Sales

pricing strategy - how to price a product

Your pricing strategy plays a significant role in getting customers for your small business. In fact, setting your pricing structure is one of the most difficult tasks a business owner must tackle. It’s easy to assume certain pricing strategies, such as cost-plus a certain percentage, valuing your time per hour, etc. However, setting a price is almost like a fine art. Here’s how to price a product or service to generate more sales.

Options for Pricing Strategies

As most experienced and savvy entrepreneurs will tell you, a higher price may cost you to lose a certain amount of customers, but the ones you attract will be the ones you want for your business.

It is imperative that you take the proper time to determine the correct pricing structure for your business. Setting your prices too low can cause you to lose money, but so can pricing too high.

Pricing your services can be even more difficult than pricing retail products that you buy wholesale. There is a lot that goes into determining your pricing so you avoid pricing mistakes.

Use these guidelines to create a pricing strategy that makes sense for your business.

How to Price a Product

Most small business owners make the mistake of thinking that more customers mean more sales. However, this is quite the contrary when you crunch the numbers. This is where sales projections can give you deep insights.

For instance, say you have a new product you want to put on the market. (By the way, this works the same way if you are trying to price your services. Your product is your time, so your “unit” is an hour or a day.)

Pricing strategies that sell at higher prices will get fewer sales but may generate more overall cash.

If you price a unit at $5, your analysis shows that you could sell 10,000 units. That’s $50,000 in gross sales. But what if you sold it for twice that? Or even four times that amount at $20?

When you crunch the numbers, you will discover that you might only sell 3,000 units, but that still grosses you at $60,000. It simplifies your manufacturing costs and allows you to find the ways to add the quality and value necessary for making that pricing justifiable. In the case of services, you can bill fewer hours to generate more income. That’s a major benefit to raising your prices.

You also need to consider servicing the products you manufacture as you determine how to price a product. Regardless of whether you develop software or make a quality central heating unit, the fewer you sell means the fewer products you will have to service in the future.

If you sold 20,000 units compared to just 5,000, just think of all the extra customer service personnel you would have to hire, train, and retain. That people time adds up, resulting in higher costs.

Pricing Strategy Examples

Another pricing mistake many new small business owners make is focusing more on what they need, rather than what they want. Say after careful analysis you determine that your solo work at home service business requires a minimum of $4,000 a month.

That covers your mortgage payment, maintenance, utilities, car payment, food, and a little left over for entertainment and a few new clothes now and then. So you can live on $48,000 a year, and that’s what you need. But what if you want $75K? Or $100K?

Just consider the possibility of $100K a year for your business. In order to earn gross sales of $100K, that would mean earning $8,333 per month. If you worked an average of 8 hours a day for 21 days a month (taking weekends off), that’s about 173 hours. That breaks down to just $48 an hour for your services. This is a very realistic pricing structure.

Pricing Strategies Based on Competition

One important task that all small business owners should do before setting or raising their prices is determining what the market value for their services or product is. Check out what other similar business are charging. It may require doing covert research in their store or calling up to “tire kick” on their pricing.

Make a matrix of your competitor’s prices before you decide how to price a product.

Then make a matrix citing each company’s prices relative to each other. Determine the average price. Then consider what adding a little extra value could do to the price. It could be packaging, home delivery of a service, a 10-point ‘quality check’. Then add that value to your product or service to justify your higher pricing strategy.

You will find that people don’t always buy because a price is the lowest. Many consumers justify a higher price as higher quality and thus are willing to part with more of their money for it.

As you consider all of your option in determining how to price a product, remember that there are many good reasons to charge more than your competitors. Raising your current prices may block certain customers whom you have previously served. However, it can open doors to an entire new customer base and an even more lucrative niche market.

LEAVE A REPLY

Please enter your comment!
Please enter your name here