Preface: The ultimate goal in pricing is to make price second to value. Value should lead what your business brings to the marketplace. Whether shopping atmosphere, product quality, or perceived excellence of service, incorporate pricing heuristics.
Heuristics on Pricing Strategies
Sales revenue is a key element to your business; and the most important decision you will make about your product(s) or service(s) is price. Sales govern business; price governs profit. Pricing power should never be neglected. Price variations, even small price variations can increase or decrease your business profitability. These price variations can be significant, maybe 50%. For instance, if your business is manufacturing carved book-ends, wages may be a significant cost of goods sold and an increase in price of five percent may increase profits significantly. If your total in cost profit is 20% of sales, raising prices five percent would increase profit approximately 25%. On sales of $900,000 per annum, income would increase profit $45,000 in this scenario.
When you price your product, incorporate pricing heuristics. Understand who your customer is, and what a customer “will” pay for your product or service, and secondly, what your customer “wants” to pay.
Cost-based pricing, the default pricing mechanism, uses cost accounting to calculate fixed and variable costs, such as a 20% markup on purchase is simply your product price. This method overlooks the willingness to pay on behalf of the customer, and competitive pricing environments. If you can buy products and sell at a 20% markup for an average of 10% net income after operating expenses, selling expenses, and general and administrative expenses, the only question you need ask yourself is what is your market galaxy. Most often, it is not that easy.
Competition-based pricing contains parameters on anticipated and observed current or future competitive market place environments. Price may be one of the more important or most important criteria for customers, but competition-based pricing should be avoided for a sustainable business strategy.
Customer value-based pricing incorporates the perceived customer value of your product(s) or service(s). Customer value-based pricing approaches sales with an understanding of what your sales constituency values. Appropriate research will assist you in determining what adds value to your marketplace. Pricing is both a science and an art; (virtually) every business desires to price their product or service at its value. Refining and reefing pricing strategy is achieved with implementation of organizational plans to exhibit and build your product or service value in the marketplace. Why are (aren’t) customers escorting cash to your business? If you know the answer to this question, you’ve probably got a deeper insight now into your businesses competitive advantages.
Understanding your marketplace is vital, Thomas Edison is quoted as saying “We will make electricity so cheap that only the rich will burn candles.” While candle manufacturing declined with the prevailing technological innovation of electricity, candle manufacturing today remains a vital marketplace with pricing power based upon customer value. The “value heuristics” of light will never diminish, but the application heuristics for pricing will. In this instance, Edison’s pricing strategy for his marketplace was not profit from customer exclusivity, but customer volume.
The ultimate goal in pricing is to make price second to value. Value should lead what your business brings to the marketplace. Whether shopping atmosphere, product quality, or perceived excellence of service, incorporate pricing heuristics.
A good business can increase prices without losing business to competitors. Sales determine revenue, but pricing power will determine your ability to increase profits. Numerous pricing strategies (heuristics) exist, but the concept is simple, don’t price yourself out of the market, but don’t leave to much money “on the table” either.