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Pricing strategy 101: Here’s what to consider when you get startedThe prices you charge can dramatically impact your sales and profits. Here’s what to consider when developing your pricing strategy.
Business owner Ashley Ayala reflects on her journey of opening Soul Revolution Yoga + Cycling Studio in Dubuque, Iowa. Dupaco helped coach Ayala along the way and gave her the financial boost she needed to take the next steps toward making her dream come true. (M. Blondin/Dupaco photo)

The prices you charge for your products or services can dramatically impact your sales and profits. Your pricing strategy also determines how customers view and respond to your offerings.

That’s why it’s important to consider your pricing options to ensure your strategy is effective.

Listen to the market

Look at your competitors, their key benefits and features, and any differentiators you see in your products or services.

You can get valuable guidance on how to price by researching:

  • Which products or services offer the best value
  • What customers expect to pay

Compare buyers’ risk on each product or service that you research. If you can offer more value (better quality or more features), you might be able to charge more.

Compare your pricing strategy options

Cost plus pricing

Calculate all the costs in production, then add a margin for your profit.

This method is easier if you sell a product because you can add up all the manufacturing costs attributable to each product.

Adding a margin

Most retail, wholesale or online businesses add a margin to every product they on-sell. This can vary depending on the industry (some will have “recommended retail” or accepted mark-ups). But online selling and third-party marketplaces have changed the playing field.

Hourly rate

Most professionals sell by the hour and charge an hourly rate (think accountants and consultants). Other businesses like builders and trades also mix in hourly rates.

A mix

It’s usually not as easy as simply selecting one format.

Many businesses sell a mix of products and services. And software or subscription businesses price their business model based on an assumption of demand.

If you’re unsure, consult with your advisers or industry association.

Benchmarking

It’s useful to benchmark your prices against industry averages, like gross profit and net profit margins.

If your margins are below industry norms, your costs might be too high or your prices too low.

Discounting

Most advisers warn against discounting without a strategy like:

  • Gaining market share
  • Discontinuing old or obsolete products
  • Releasing working capital and improving cash flow

You’ll want to determine how much extra you need to sell to cover any discount.

Regularly review your pricing strategy

Reviewing your pricing strategy ensures you’re keeping up with trends in your industry and the overall market.

If you cut prices, customers might perceive the new prices signal low quality or a lack of confidence and experience.

Convince your customers

If you’re sure your costs are optimal, convince your target market that your products or services are worth the price.

Here are a couple of options:

  • Provide guarantees or extended warranties.
  • Offer free services like after-sales service.

Remember to talk about the benefits of your goods, not just the features.

Does your product make a task easier, cheaper, faster or more efficient? Consumers generally care more about what’s in it for them than the product’s technical specifications.

Consumers generally care more about what’s in it for them than the product’s technical specifications. And these tips can help you justify your prices.

Price increase considerations

Before you increase your prices, do your due diligence on the competition. What are they charging?

Keep in constant contact with your customers and listen to their feedback.

Remember that you’re convincing them that the price increase is worth it to keep you as a supplier. So, your customer experience, product and service must be consistently great.

Communicate your price increase

The hardest part of increasing prices is informing your customers.

You have some options:

  • Contact customers and tell them why you’re increasing your prices. Did your material costs increase? Has the exchange rate moved? Often, customers understand.
  • Increase prices on less sensitive items and don’t say anything. You might be surprised (depending on your industry) how often a price increase goes unnoticed.
  • Warn customers. Avoid an overnight increase. Instead, talk to any key clients that might be unhappy so you can discuss solutions and options.

Final thought

Review your pricing strategy options before you commit to one.

When deciding on your strategy, it’s a good idea to consult with your accountant or adviser to make sure you’re charging enough and not missing any calculations.

Unless you’re planning to seriously disrupt the market, you should aim to charge as much as possible.

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