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How To Choose A Pricing Strategy For Your Business
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After you go through the tedious setup process for your new business, you aren’t in the clear yet. In fact, you have one of the most important steps ahead of you. Prcing.
Choosing a pricing strategy is critical to ensure your business is successful, making it important to analyse fixed and variable costs, consider your desired profit, understand your target market, and weigh competitor pricing.
Analyse Fixed And Variable Costs
The first pricing strategy is to analyse the fixed and variable costs your business incurs to sell your product or service.
Fixed costs are costs that occur regularly while variable costs are subject to change. Common examples of fixed costs include rent, utilities, and wages.
On the other hand, variable costs include advertising, bank fees and supplies. Adding up your direct and indirect costs tells you about the breakeven point for your business.
This can be helpful when determining product cost.
Consider Desired Profit
The next pricing strategy many businesses utilise is pricing based off a desired profit. Let’s say you want to make $50,000 a year from your business and you sell 10,000 goods each year. If your indirect and direct costs related to the 10,000 units comes to $5 a piece, you would want to sell each unit for $10 a piece (($50,000/10,000 units) + $5 costs).
Considering your desired profit is one way to back into your sales price.
Understand Your Target Market
Before you set your selling prices, you need to be sure you understand your target market. Market research into your desired customer base gives insight on how much they generally are willing to spend on a product.
If your research uncovers that customers are only willing to pay $15 for the product you are selling, don’t mark it up to $25. This results in minimal sales and lower business success.
However, if you are able to differentiate your product from competitors through offering expanded features, you may be able to justify the higher price.
Look At Competitor Pricing
Another effective way to develop a pricing strategy is to look at competitor pricing. The amount competitors are charging customers is a great starting point for your products and services.
Analyse the differences in features and desired target market to build your pricing strategy based on competitors. Keep in mind that competitors with an established customer base are able to charge higher prices, so adjust accordingly.
Summary
Developing a pricing strategy is an important step when setting up your business. As a business owner, the burden falls on you to consistently review your current pricing and adjust for inflation and changes in customer demand. This is one of many skills a business owner needs to develop, so be sure to check out our article on the top 5 skills every business owner should have, it just might help steer you in a better direction!
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