A Guide to Effective Pricing
This is a guest post by Uyai Effiong, one of our members here at CapitalSquare.
Uyai is the Managing Consultant of Areedi.com. Areedi is a business consulting and design firm that is passionate about growing businesses in Nigeria. They help discover the true potential of your business and work with you to reach your business goals.
Pricing a product or service appropriately can be one of the trickiest parts of running a business. How do you know what the right amount is? If the price is too high, potential customers may not be able to afford it. If it’s too low, the business has to deal with reduced margins and may not be profitable in a reasonable amount of time. How can you strike a balance?
Consider the following when trying to price a product or service:
- Is the pricing competitive, compared to similar offerings on the market? Competitive doesn’t mean the actual amount you charge has to be the same. If your product is of a higher quality or has more benefits relative to what is available on the market, you can charge more. If it is a bare bones product that will appeal to the masses, you can charge less.
- Are the costs covered? The costs to produce your goods or deliver your services should be adequately covered by the pricing. Depending on what you’re selling, this could include costs like labor, materials, packaging, shipping, administrative costs etc.
- Is this of value to potential customers? Products that have more value tend to be priced higher. Cars are valuable, and usually cost much more than kitchen appliances like toasters. Even within the car category, a Mercedes car will generally cost more than a Honda.
- Will it help the business make a profit? The pricing should cover the costs to produce, as well as a little more to help your business make profit.
A few words of caution, though:
- Not everyone can be the cheapest person to offer a service 100% of the time. There is always someone else who can deal with extremely low margins and can run you out of business. You have to decide if you really want to run in the race to the bottom business category.
- Remember the Mercedes and Honda analogy above? There are many different car manufacturers that play at different price points. There are cheaper cars than Hondas. There are more expensive cars than Mercedes. Everyone has customers that can pay at the different price points. You can choose where you’d like to play in your own industry.
- Feel free to test your price points. Maybe you can offer deals or sales to bring in new customers or to delight old ones. At other times, you can play around with increasing prices to see what the market will accept from your business. Prices don’t have to be static, and you can experiment to find an appropriate price range.
Use these tips to help you find out what your customers are willing to pay and hopefully you’ll arrive at a price that will also help you to be profitable.