Getting the pricing right
QUALITY, ATTACHING VALUE AND APPEASING THE CUSTOMER Don’t use the copy-andpaste pricing strategy.
There are certain aspects of a business that an entrepreneur must get right if he or she is to have any chance of success in their venture. One such technical aspect is pricing. Determining an appropriate price for your product or service is no easy exercise and it’s so detrimental that it can make or break your business – even if you have a quality product or service.
But how can something so simple carry such weight on the outcome of a business? Surely it’s as easy as attaching whatever markup you deem necessary to maximise your profits?
Unfortunately it’s not that simple. There are a myriad forces that come into play and sometimes even dictate your eventual pricing strategy. Macro and micro factors have a massive influence, therefore pricing becomes a delicate task which is both an art and a science.
Accurate pricing depends on your ability to appease certain parties. On the one hand you must price adequately to ensure your business at the very least breaks even, but at the same time you also need to make a profit. On the other hand lies the all-important customer: if you price too high you scare away a bulk of potential customers, but price too low and your product could be perceived as inferior in quality.
Finally, there is market influence. Every industry has a certain range at which a product or service can be priced.
Average industry pricing is determined by the supply and demand theory, which says that the market will balance itself out at an agreeable selling and buying amount, based on demand or supply. While that’s not to say it’s impossible to enter the market at 200% higher than the industry average, what you might find is customers opting for a cheaper alternative, where quality is upheld.
Market forces play a significant role in determining your pricing model and sometimes it can be a nightmare to calculate an appropriate price. But however difficult it can get, don’t use the copy-and-paste pricing strategy. It might seem like a plausible solution to use a competitor’s prices, but the cost methodology that went into their pricing is personal to their situation.
Therefore, how do you appropriately price your goods or services?
There’s no definitive answer to that question, but we do learn from managerial accounting of the different pricing models such as value-based pricing, hourly, fixed, performance-based, retainer and cost-plus pricing – all of which I shall expound on in next week’s column.