Possibly one of the most important business strategies to get right is to price your products and services at optimum levels. You may have heard of the Laffer Curve, which although typically applied to setting tax rates could just as easily teach business owners a thing or two about price setting. The Laffer Curve teaches us that there is an optimum point at which taxes must be set – and beyond that point, any tax rises actually result in a fall in tax revenues raised.
It’s astoundingly similar in the business pricing world – finding the premium level at which to set your prices is simply crucial. Too low, and you’re leaving profits on the table. Too high and you’ll struggle to turnover sufficient volumes because people just wont buy. Understanding and setting an optimum price point isn’t exactly scientific – it’s a soft skill that requires you to understand the market, your customers and the competition before tweaking and tinkering to find the right level.
Here are a few tips to help you price your products just right:
- Refer to market research. If you’ve conducted market research, you should have asked about the sort of prices that potential customers would be willing to pay. This is a good starting point to get a vague idea about where your product price level should hover at. If your product is at the test/development phase, then ask a suitable group of clients what they may be willing to pay for it.
- Price for profit. Your business exists to crank out a profit. You can’t do that if your product price leaves you with break-even mediocrity. Know your costs inside out, and set a modest mark up so that your products can turn a profit.
- Know the market competition. What prices are similar products and services selling for? Before introducing a new product/service into your range, you should always carry out a thorough competition analysis – and this involves noting the prices at which they’re selling the same product that you intend to. Keep in mind however that price need not be the only unique selling point that will attract customer service. You can price yourself higher or lower than your competition depending on your company ethos and style. Higher prices can be justified when synonymous with superior quality, and better customer service for example. The trick is not to price yourself too far away from the median market price (in either direction).
- Test different price levels. Ultimately, you’ll probably only really know your optimum price points by testing at different levels and seeing which one hauls in the most profit. When you do tweak your price, watch the sales volume like a hawk immediately after the change to measure the effects.
- Listen to feedback. Ultimately, feedback from your existing customers will be the best indicator of how sweetly you’ve priced your products and services. Asking customers about how the quality is in comparison to the price is always a good idea – it also demonstrates that you care about what they think.
A good, effective pricing strategy is an essential part of any business – get it right and you’ll be extracting maximum profits from the market. Get it wrong and it might just be the difference between a profit and a loss.