Many people have incredible business ideas – perhaps even world-changing. And a lot of work goes into turning those ideas into a reality, driving buzz around the product, and storming towards a successful launch. But as soon as that launch date arrives, no one buys. You might be perplexed, confused, and unsure as to why this has happened. But then it will hit you – your pricing is all wrong.
Many first-time entrepreneurs fail to realise the critical importance of pricing. Get it right, and you could be on your way to great success. But achieving the right balance is a lot more complicated than you might think. It’s a tough job, and it is easy to get wrong – which, ultimately, can result in abject failure. With this in mind, here’s a rundown of everything you need to know about pricing your products or services.
First of all, it’s important to understand that products and services pricing has a few ground rules. First of all, you need to cover yourself regarding costs – the amount you spend to create a product or service – and you also need to make a profit.
Furthermore, there’s a need to fit your business pricing into the wider market. Who else is selling similar products, and for how much? Is there a significant demand for your product, but little in the way of supply? Ultimately, however, getting the right price point is all about one thing – driving sales.
So, if you want to price your product or service correctly, you need an in-depth awareness and understanding of your audience. Market research will tell you lots about how much people will be interested in your product, and demographics could reveal the amount they are capable of paying.
Ultimately, you will be pitching your product to one of three basic groups: people who don’t have much money; people who want convenience, and individuals who demand luxury or the very best service. You must understand which of these groups is your target before you even start sourcing raw materials.
The next step is to work out your costs per sale. And there are many expenses to consider. Raw materials, utility bills, rents for offices and factory space are obvious starting points. There’s the cost of manufacturing to think about, too, not to mention your employee’s wages.
Shipping, inventory management, equipment and software programs – everything you use to get your idea from your head to the market needs to be accounted for and added to your cost of sale. Then it’s a case of working out how much you need to sell to break even, and how much you need to sell to turn a profit. However, we aren’t quite done yet on costs…
Another vital concept to grasp is that the best way to make more profit isn’t to make more sales – it’s to cut your costs. So, before you go ahead with production or introducing your service, think about if you can cut back on your expenses. Is your electricity bill too high, and could you reduce it by enforcing a more eco-friendly – and cost-efficient – policy? Is the expensive office you want as a base for operations really necessary, or could you find a cheaper place elsewhere?
There are a thousand and one things you can do to stop wasting money, all of which will boost your bottom line and either a) increase your profits, too, or b) allow you to price more aggressively. Once you have a good grasp of your costs, we can move onto estimating a revenue target.
When you have cut all the costs back to protect your bottom line, you will have a better idea of how much you could make. But, ultimately, it’s all about accurate estimation. You will need to look ahead over the next year or so and have a realistic – and informed – guess of how many products or service offerings you will sell. Once you have established this figure, you can start deciding on a price – but there is still a significant chunk of work to do.
You can decide on one of the several methods of establishing the perfect price point. Cost-plus pricing is typical in the manufacturing industry and is one of the easiest to work out. You figure out your costs as above, factor in your profit margin, and price your products accordingly. Bear in mind that this method requires pinpoint accuracy, as any missing costs could end up seeing your product losing money.
Demand price is also popular – especially among retailers and wholesalers. Demand pricing uses a primary method of buying and selling in bulk and lowering prices in accordance with sales volume. It is a tricky strategy to master, however, as it relies on a lot of liquidity in calculation and pricing.
The final two common strategies are markup and competitive pricing. Markup pricing is when you add a specific amount – usually a percentage of cost, not gross margin – to each sale. And competitive pricing involves looking at what everyone else in your market is charging and pricing your products and services accordingly.
Ultimately, pricing your products and services needs to be a fluid and flexible process. Your ideas of pricing on day one are likely to be a lot different by the time you come to launch. And the simple truth is that in the vast majority of markets, prices go up and down all the time, and you have to take those changes into consideration. The key to success is to keep on top of your pricing analytics, to ensure that you are making the correct decisions and avoiding losing money.
The end goal is to do more of what works, and stop what isn’t – and always keep reevaluating those costs. Sometimes you will need to lower your price, but you may also benefit from raising it. If you are in the service industry, for example, it makes sense that as your knowledge and skills grow, so should your prices. Good luck!
This article first appeared on the X-Forces Enterprise Knowledge Exchange Hub. Membership is free and provides access to a wealth of information, expert advice, and the opportunity to connect with one of our Business Captains – an experienced businessowner who can act as a mentor on your entrepreneurial journey.