Today, let’s delve right into pricing strategy. It’s more about the method of setting your price points in a way that establishes your product as competitive in the eyes of potential clients/buyers.
“When considering your price, it’s important to realize that it’s not for yourself, but for your target customers.”
– Eric Dolansky
Your goal is to identify a price that is between the floor pricing and your cost or your cost and the pricing ceiling. The price ceiling is the maximum price that can be charged for a product or service while floor price is the lowest legal price that can be paid in a market for goods and services.
Price Ceiling vs Floor pricing
To choose the right price within your customer’s acceptable range, consider the main factors that affect the price mentioned below:
- Calculating your true/real costs.
- Looking at the market.
- Knowing your customers.
- Considering time invested/fluctuations in demand/inventory.
- Coming up with a fair profit margin.
- Creating a financial model/business model for your pricing.
STEP 1: KNOW YOUR COST
A great step is understanding your real cost. You should not guess it but work it out, then you can be guided on what to price the solution/service.
Add up all production costs. Identify which of the costs are fixed (fixed costs remain the same regardless of whether goods or services are produced or not) and which ones are variable (those costs that increase and decrease with production or sales volume.).
A Simple Exercise: Take your total cost of production and subtract the variable cost of each unit multiplied by the number of units you produced. This will give you your total fixed cost.
STEP 2: LOOKING AT THE MARKET
Research all you can about your competition, what they’re offering, and their prices. You need that to give you a sense of the going rate and can also give you some ideas about how to differentiate. This can be a guide to determine what price the market will bear.
STEP 3: KNOW YOUR CUSTOMER
Understand your ideal customer (sometimes the user is different from the buyer). Is your product a consumer good for them? What is the type of disposable income they have for such a product/service? Is your solution or service key for them? What kind of budget do they usually spend on such solutions or services? Are they open to a one-time payment, SaaS model, payment over time, long contracts, etc.? If you are an exclusive provider of a niche service/product, you can definitely get away with higher Margins. If you are selling a commodity with options from other companies, even though you can push volumes, your margins are likely to be lower because of the competitive nature of your market.
Photo from Unsplash
Now that you know your cost, competitors’ prices, and customers’ appetite for your offering, you can use one of these methods for pricing:
- Cost-Plus Pricing: Determine your price by calculating your cost of goods or services and adding a markup. This method is simple and time-saving but may overlook customer preferences.
- Competitor-Based Pricing: Set your price based on what your competitors are charging. You can match their prices, charge higher (if your offering provides more value), or set your own price independently. However, this approach can make you vulnerable to market surprises.
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- Value-Based Pricing: Price your product or service based on its perceived worth to the client. This approach can vary depending on factors like client size, budget, and needs. It works well for B2B businesses but can be challenging for commodities.
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My recommendation is to learn and adapt these methods as your product or solution evolves in the market. You can start with value-based pricing and later incorporate cost-based and competitor-based pricing strategies.
Stay tuned for our next article, which will delve into pricing structures, including variable pricing, tiered pricing, per-user pricing, usage-based pricing, freemium models, and more.
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