The price/rate you charge for your products or services can have a major impact on your turnover and profitability. Setting your prices too high can reduce sales growth, while undercharging can kill your profits.
Some say pricing is more of an art form than a science, however our top pricing tips should provide logical food for thought;
1) Understand your market. Unless you have a complete monopoly of a unique product/service, your product’s value will depend on the competition. Identify who your competitors are; what they offer and the key features of the product/service and benefits. The objective should be to price at a level offering the best value to your customers.
2) Regularly check your prices. Keep up to date with the market and what your competitors are doing. Has customer perception of your product/service changed that warrants an increase.
3) Your Price point Offering. Break down what you can offer into separate categories. You may be able to target different market sectors with products or services that are applicable to that sector. Some customers want a Premium product or Service which can contribute higher margin.
4) Pricing Strategy. Be clear on your pricing strategy and how it fits into your overall business positioning. For example are you bargain basement, market leader, niche player or a premium offering? This decision will affect how you manage other areas of the business too, for a low pricing strategy you will need to focus on achieving volume and minimising overhead as margins will be slimmer. We would also comment that even if you offer a premium product or service you should always aim to minimise cost.
5) Aim High. Under- pricing what you do can be a lot more damaging than overpricing and reducing prices is easier than increasing them. A low price can be off putting and may impact brand strength if customers associate price with quality. Low prices can also attract unprofitable problem customers and those who are price sensitive and disloyal when prices increase.
6) Understand Your Numbers. Pricing obviously has a huge impact on turnover and profit, therefore you must be comfortable with the effect that price changes can have on your financials. We recommend using basic modelling to see the effect that price changes can have on your business (including increases, discounts, promotion). Nothing flash is needed, a simple spreadsheet can highlight potential big gains and risks. We would also recommend that you get comfortable with your margins and profitability. If you can, benchmark against the market. If your prices are comparable but profit margin lower than the norm, this could indicate an issue with your purchasing and overhead cost.
7) Transparent Pricing. Customers hate unwelcome surprises therefore make sure that when you are quoting prices you spell out exactly what is included and that you are comfortable defending the price you quote.
8) Increasing your Prices. Nothing can have as big a positive impact on your profitability like a price increase and making it stick. We recommend giving customers plenty of warning if they need to budget for an increase. We also recommend that you explain why the increase is needed. Customers don’t like unexplained increases and you can use the increase as an opportunity to reemphasise the benefits you offer. Alternatively you could try to hide the increase by gradually introducing higher priced products, making lower price products/services obsolete or lowering the specification or service level.
Baillie Accountants are dedicated to helping client businesses grow and achieve their objectives, to find out how we can help you please contact us.