One of the secrets to business success is knowing how to set the best price for your product or service. If you set your price too high, you may scare away customers and favour your competition. If your price is too low, you may be losing profits and running your business at a loss.
Is there really something like a ‘best price’? Can entrepreneurs set prices that attract customers and guarantee good profits? The good news is, it’s possible! But you’ll have to know the strategies to apply and in what markets to apply them.
In this article, you learn the five major ways to evaluate your target market, know your customers, and set prices that will appeal to them. If you can do this, you would have conquered a serious problem that over 70 percent of businesses still suffer from.
Ready? Let’s find out the five secrets that will help you set prices that target the sweet spots in your market…
1. VALUE: Always Focus On “Value To The Customer!”
One of the most effective strategies you can use is to price your product based on value.
The value of a product means different things to different people. The more value a person places on a product or service, the higher the price they’re likely to pay for it.
Let’s use an interesting example:
How much would you pay for a bottle of water? Would you pay $1,000 for a bottle of water? Most people reading this would say:”Impossible! I would never pay so much for an ordinary bottle of water”.
Right now, as you read this article, a bottle of water may not hold a lot of value in your eyes.
Why? Water is everywhere around you.
It’s easy to get and you can easily pour yourself a glass of water from the kitchen tap or buy a cold bottle of water from a nearby store.
But what if you’re lost in the middle of the Sahara desert and you haven’t had any water to drink for five days. The burning desert heat has severely dehydrated you. Your mouth is dry, you’re horribly thirsty and if you don’t find any water to drink soon, your life could be at risk.
In fact, for you, money is not a problem. Your pockets are heavy with money. If only you could drink money, you wouldn’t have a problem. Yet, you have searched everywhere and can’t even find a single drop of water, clean or dirty.
What if at that moment, somebody showed up with a bottle of water and offered to sell it to you for $2,000? Would you pay such an outrageous price for a single bottle of ‘ordinary’ water?
Of course you would! You will happily and most certainly give all the money you have for that bottle of water. Why? Because your life depends on it! Your peculiar situation/problem/challenge has dramatically increased the value of water in your eyes. That’s why you’ll pay anything to have it.
This example may sound quite extreme, but it clearly shows how consumers react to price when the product holds a lot of value for them. This value could be based on several factors such as emotions, survival, greed, scarcity, status etc.
Lesson for entrepreneurs:
If you have a unique product that has no alternatives or competition, this strategy will work well for you. The higher the value customers place in your product or service, the higher the price they’re likely to pay. It’s a natural law and a fact of human behavior.
However, to succeed with this strategy, you need to do two very important things. First, you need to know what value means to the customers who will buy your product or service. Second, you need to precisely target the people who value your product or service. Precise targeting is very important for this strategy to work.
Businesses in the fashion, luxury, health, consulting, elite services and art/antiques/collectibles industries usually use this pricing strategy with great success.
However, you need to be careful when using this strategy. If you set your prices too high, your customers can still pick an alternative product or not buy at all. Also, your high prices may give incentives to competitors to copy your product/business and then undercut your price, which could seriously threaten your business.
2. CUSTOMERS: Can They, And Will They, Pay?
You can set any prices you want, but if your target customers cannot afford it, your business won’t sell anything. That’s why it’s always a good strategy to analyse your market and study your potential customers when you’re setting prices for your products or services.
Don’t forget, if your price is too low, people may think you’re ‘cheap’. Others may think there’s something ‘fishy’ about your product and may not buy. On the flip side, if your prices are too high, people may not buy at all.
So, how can you know the best price to set for your product? One simple advice: Know your customer!
By studying your target customers’ behaviour, likes, dislikes, preferences, tastes, lifestyle, income levels etc, you will gain a lot of insight that will help you to set the right prices for your products or services.
There are three main types of customer groups you should always consider when you’re setting prices. Here they are:
- Price-sensitive customers – For this group, price is the most important factor that affects their buying decision. They may be working with a budget or just be bargain hunters who like to buy things at the lowest price possible, no matter the time and effort it costs them. Most times, no matter what you promise, this group of consumers will not buy what you’re selling unless your prices are the lowest they can get.
- Convenience-centered consumers – This group of customers value convenience more than everything else. They’re not willing to suffer any inconvenience just because they want to find the lowest prices available on the market. They will gladly buy a product or service that is nearest to them and easiest to buy or use. This group of customers is willing to pay a higher price to avoid hassles and enjoy the convenience.
- Quality/Status-conscious customers – This group will pay anything to get the best quality of a product or service. Most times, they’re willing to pay a much higher price to get the most value from a product or service. Because they can afford it, price is never really a problem for this group. As long as you can meet their quality needs, they’ll gladly pay.
Lesson for entrepreneurs
To succeed with this pricing strategy, you need to know which of these groups makes up the highest proportion of your target market.
Providing home-delivery services is a strategy that will appeal to convenience-centered customers. Offering volume discounts (like “buy two, get one free”) will attract and work very well with price-sensitive customers. Providing “elite” and exclusive products and services will work well with quality and status-conscious customers.
Always remember that to get the best results from this strategy, you have to do your homework and study your target market very well. The more you know about your target customers, the better you can set a price that will appeal to them.
Putting your customer first is a strategy that always works!
3. COSTS: How Much Profit Can You Make At That Price?
To survive and succeed in business, you need to make profit. Profit means that you’re selling your products or services at a price that is higher than the amount it cost you to make the product or deliver the service.
Before you set a price for your product, you need to be very sure that it covers your costs and will make you a profit. Apart from the cost of making a product, you also need to know how many products you need to sell in order to turn a profit.
The problem is, many entrepreneurs just set a price that looks good without first checking if the price covers their costs and will be profitable. If you set a price that favours your customers, but is bad for your business, it will only be a matter of time before you won’t have a business anymore.
Just to be sure that you fully understand what your costs are, it’s important that I share some basic knowledge about costing with you.
There are essentially two main types of costs you should consider. Here they are:
- Direct costs – These are the material and labour costs that are directly involved in the production of a product or service. For example, if you produce fruit juice for sale, the cost of the raw fruits you bought from the local market and your transportation to and from the market will be calculated as direct costs for the production of the fruit juice you sell.
- Indirect costs (or “Overhead” costs) – These are costs that often cannot be directly traced to the products or services you sell. Things like insurance, security, bank charges, electricity, telephone bills etc. are categorized as indirect costs.
If you would like to learn more about costing and the differences between direct and indirect costs, here’s an interesting resource that will help: http://en.wikipedia.org/wiki/Indirect_costs#Indirect_vs_direct_costs
Lesson for entrepreneurs
As long as you’re not in business for charity, you have to make profits to survive. Period! And one of the most important steps to determine the best price to set for your product or service is knowing how to calculate your costs. If your cost is more than your price, it’ll only be a matter of time before you run out of business.
4. COMPETITION: Watch Their Pricing Closely…
Everybody who does business knows that price is one of the effective ways of attracting customers to your product or service. This is why you need to always consider the pricing of your competitors.
Don’t be naïve, consumers are smart; they always want a fair price. They will always compare your price against your competition, and if a competitor’s product is cheaper and there’s no major difference in the value of the products, you could lose customers to your competition.
Business is a race. You need to constantly make sure that your product or service is competitively priced, especially if your products and services are similar to those offered by the competition.
If you want to price your products higher than your competition, you need to offer something extra or different; you have to differentiate your products. Because, the more similar your products or services are to the competition, the more likely it is that customers will always compare your prices with others.
Higher quality, loyalty programs, convenience and value are some of the things that could set you apart and allow you to charge higher than the competition.
It’s always a good idea to find out what your competition is up to. Phone calls, secret shopping and published market data are some of the ways you can get valuable information about your competition. Buy from your competition to test their products and evaluate it from a customer’s perspective. Can you offer a better product or service? Can offer the same thing at a competitive price and still make a profit?
Lesson for entrepreneurs
Always remember that you’re not in the market alone. The next business will be looking for ways to attract more customers and pricing is often the favorite weapon. If you were the only business selling a particular product or service, you could set any price you want. And as long as your product is valuable and the price is reasonable, people will buy.
As long as you have a competition that is looking for new ways to attract the same customers you’re targeting, price would always be a big influencer. Don’t make the mistake of ignoring your competition’s pricing only to wonder why they’re selling more products than you are.
5. DEMAND: How Hungry Is Your Market?
More than 99 percent of consumers only buy products and services they need or desire. Why buy something you don’t need or desire?
But there are times when people are ‘forced’ to need and desire certain products and services. In such periods, the demand for these products and services skyrocket beyond the supply in the market. When such events occur, it’s usually an opportunity to raise prices!
For example, during festive seasons like Christmas, New Year and other religious and national celebrations, the demand for food products automatically increases. Why? Because more people than usual will want to buy foods like rice, chicken, drinks etc. to celebrate with their families.
Before the Ebola outbreak in West Africa, not many people knew about or had used a ‘hand sanitizer’ before. The demand and price of this gel, which is usually applied on the hands to kill germs, skyrocketed. The huge unprecedented demand for this product made it a highly-priced product overnight.
A few years ago, Nigeria introduced a new policy that made it compulsory for motorcycle riders to wear crash helmets. Guess what happened? The price of crash helmets rose by more than 500 percent! That’s what happens whenever the demand for a product outstrips its supply in the market.
To get the best price for product or service, it’s always a good strategy to target periods of high market demand. Is there an event, trend, government policy or occurrence that could lead to a massive growth in the demand for a product or service?
Lesson for entrepreneurs
By targeting times of scarcity or excess demand, you could increase your pricing as a strategy to make more profits. These opportunities are not available throughout the year so it makes perfect sense to exploit it the most you can.
Are You Ready To Set The Best Price For Your Product?
There is no one-size-fits-all strategy for pricing a product or service. It all depends on the nature of your target market, the competition and the kind of customers in that market. You have to apply the strategies in this article until you find a price point that works best for you.
The most important lesson you will ever learn about pricing is this:
“The best price for your product or service is one that is low enough to attract customers but high enough to make you a good profit.”
Do you have any questions about pricing? Just ask in the Comments section below and I’ll do my very best to give you a practical answer.
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To your success!