Pricing your products and services right is probably one of the most difficult decisions you have to make as a business entity. Sincerely, the success of the whole production process and the long term future of the firm have a lot to do with the pricing decisions of the firm. Employing the wrong pricing strategy has had an enormously negative effect on some firms. Incorrect pricing is enough to send a thriving firm out of the market and could be the harbinger of the immediate demise of a new firm which is trying to gain access to an industry.
Price is what you pay. Value is what you get.
Price Determination
When it comes to price determination, no one could truly say for sure which method is best. Experience has told everyone that there is no scientifically proven best pricing strategy at any time. The best pricing strategy that any firm could employ at anytime has to do with a lot of factors that is prevailing in the business environment at any given point in time. Reconciling all the factors and using it to come up with the right price at a particular moment is the best thing any business could do to beat the pricing conundrum.
In the end, to erase any sort of doubt when determining the price for your products, it is important to know that the right price for your products is the least amount of money you are willing to receive for your products and the highest amount of money which your customers are willing to pay. Now, this is where you draw the line in determining the price for your products if you want to make any sort of profit at all. There must be the least amount of money you can accept and there is the highest amount of money the consumers are willing to pay or have been paying for products similar to your own in the past. Finding the perfect way to align these two distinct desires would put you on the right line to determine a sustainable price for your products. What this means again is that as a firm, you must be ready to come up with products that are very competitive if you want to charge a competitive price as consumers know exactly what they want and they won’t be forced to pay top dollars for products they believe do not offer the essential qualities they desire.
Things to Avoid When Determining Price
When determining the pricing for goods and services, a lot of firms make some mistakes which end up hurting them because they want to attract customers and beat the competition. It is true that a good pricing strategy may beat the competition and drive up sales, but it is essential you know for sure it is the best you could do at that particular point in time, else, the business would lose its competitive edge and clients should the decision not work out as planned. In determining price, there are two main mistakes you must avoid. They are:
- Overpricing
- Under-pricing
A lot of firms have decided to put premium prices on their products just to gain competitive advantage and drive up sales. The argument for the proponent of this model is that premium prices are indicators of great products and consumers would fall over each other just to pay a few dollars more for a quality product rather than paying less for a product of lesser quality. This assumption is very true and it can bring in a lot of customers if it is implemented right. However, nothing can kill a business faster than this. Consumers are no fools and they recognize quality products after making use of them. If your basis for charging premium price is not because you are producing premium products, then your customers will discover this and stop patronizing you. Information about things like this spread fast too and before you know it, the business would have lost a lot of clients because you are charging a price that is not proportional to what you offer. This would make you want to bring down the prices of your products to gain more customers again. However, reducing the services of goods and services without a proper reason is one of the surest ways a firm would die a natural death in no time. Price reduction is an indicator of a firm struggling to sell inferior goods at all cost, and the bad news is, consumers don’t like associating themselves with bad products.
The argument for under-pricing is, if used efficiently, it can help the business win a lot of customers from competitors and hence, the business would achieve competitive advantage. This is true to some extent as nearly everyone would love to enjoy some discount and save up some money while still getting the desired quality. However, this can only happen if done with the right strategy. Undercharging customers for your products without taking into account a lot of factors would seriously harm the firm. In the first instance, it is important that firms realize they are in business to make profits and maximize shareholders wealth. The only way to achieve this aim is by charging enough to cover the costs of production and other marginal expenses. In Economics, it is said that businesses would start making profits only when marginal revenue is equal to marginal cost. To cover your cost, you must charge what is attainable in the industry, as failure to do so would deprive you of profit and a firm without profits would definitely fail sooner than later. There is also the perception of the public about your firm and its products if you under-price your products. Some schools of thought would believe you are under-pricing your products because they are inferior to what is available in the market and this could be enough reason for some people to totally reject your products.
Factors to Consider When Determining the Prices of Your Products
In determining the right price for your products and services, there are a lot of factors which must be seriously considered to arrive at just the perfect price that would solidify the standing of your products and probably allow it to gain the competitive advantage every business desires. We have provided the details about some very important factors which we believe would help your business come up with the right price for its products.
- Costs Associated With Your Business
- Your Customers
- Your Competitors
- Trends of the Market
This is probably the single most important factor when determining the prices of products. As a business, you are designed to make profits at the end of the day as that is the only condition sufficient for you to continue to operate and stay relevant. As earlier stated, Economics has made it simple by teaching us that you can only start making profits after your marginal revenue equals your marginal cost. How do you achieve this? Before determining the price for your products at all, it is important for you to list out all the costs affiliated to the production process from the inception to the point where the product is put up for sale. You should also not make the mistake of neglecting other accrued costs that arise after the product has been perfected for sale as they might be the difference between breaking even and making real profits. As such, when determining your price, the following costs should be considered; cost of raw materials, labor cost, costs associated with marketing, cost of sales, operating expenses, borrowing cost, salaries and wages, initial capital invested, repair costs, provisions for future expansion, all of these costs must be considered and factored in when determining your price so as to arrive at a price that would make it possible for your business to operate optimally.
Your customers play a major role in your business. No matter how sound you may be in accounting and technical expertise, your business would still not make it without the customers who buy the products. Before determining your price, it is very important for you to research your customers and know what they want, how much they have been paying and how much they are probably willing to pay for your goods and services. In your research, you should try and know how receptive your potential customers are to changes in price, how they see new products and react to the prices in comparison to what is already available. All of this could be done through the use of questionnaires or by engaging some selected members of your targeted customers during market promotions to know what they think about pricing and how it affects the performance of your products. Their response would go a long way in determining the right price for your product.
Another factor to consider when determining the price of your goods and services is your competitors. Your competitors could be used as an initial benchmark to determine your price at the beginning. You are not expected to use the same exact price they use for their products as there are a lot of internal factors that you may not understand. However, their price could be a reflection of what is attainable in the market and a pointer towards the kind of money the consumers are willing to pay for the kind of products you are offering at the particular point in time. Understanding your competitors and using their pricing model to arrive at your own could be beneficial and ultimately help you in choosing a pricing model that is even better than their own.
To be successful in choosing the right price for your products, there is the need to measure the market trends in the industry you wish to operate in. Market trends open up everything for all to see if you look closely. By studying the market trend of your industry, you will be able to determine the reigning market price, the price at which the individuals are comfortable with, what they are willing to pay now and what they can pay later. A combination of all of these trends would come in very useful for your business when trying to determine the price that would be acceptable to the market right now and in the nearest future.
Benefits of Choosing the Right Price for Your Products
Choosing the right price for your products is the first step to fulfilling all your set business goals as an organization. The right pricing would most definitely benefit your business in many ways. Let’s discuss a few below with Apple Products as a case in point;
- Helps the business to maximize profit.
- Helps your business to gain competitive advantage.
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Helps to stabilize the business for the long term. The right pricing strategy would provide the platform to help you stabilize your firm from the beginning for what is to come in the future.
Without any shadow of doubt, determining the right price for your products would go a long way in helping you to maximize profit. This strategy has played well for Apple Products as they produce the hardware in Asia and then sell for top dollar to customers all over the world. You can only maximize profit by performing very well in all ramifications of the business functions, and setting the right price is the foundation for this.
The right pricing would help your business to gain competitive advantage over its rivals. A well researched pricing would allow you improve on what your competitor has by either altering it upwards or downwards a little bit to give the customers the exact thing they want. This would allow you to attract more customers and secure a competitive edge and Apple has always made sure they set the price in a way that is affordable for some, and also so cheap that it loses its elite appeal.
There are a few things a business could do that would have more impact on its future much more than price determination. As such, it is very important to go through a thorough process when looking to determine the price of your products and services as the impacts of not getting the right pricing is too important a decision to be considered lightly.
With important decisions such as pricing to consider, it’s important for businesses of all sizes and in all industries to comb out a quarterly plan so that they can sort out their priorities in advance and focus on the right commitments. OKRs are an effective goal-setting methodology that allow companies to designate key goals, or objectives, for each quarter or year and devote the company’s resources and manpower to see them fulfilled. The market research and deliberation required to determine the correct price for a product is one of the most important decisions that a company can make early on, and dedicating on OKR to developing, researching, and pricing a new product would be an excellent way to ensure that this important process is given adequate time and attention.