10 Sep

DataCrops-Pricing-Intelligence

 

Last week we talked about the pitfalls and effects of under-pricing and over-pricing your goods and services and the dire effect it can have on your business. So this week as promised I want to take this a bit deeper for you and show you three of the six key factors you can use today to successfully set your prices and help you generate more revenue, build your brand, and successfully grow your company. Here is step number one;

1. Understand Your Other Business Priorities  Icon 18
You need to have a clear understanding of what you want out of your business when pricing your products or services. Aside from maximizing your profits, it may be important for you to expand your market share which may help you decrease your costs or it may result in what economists call “network effects,” i.e. the value of your product increases as more people use it. (A great example of a product having network effect is Microsoft’s Windows operating system. When more people began to use Windows over rival products, more software developers made applications to run on that platform.)

The strategy I have found to most successful and one I use myself, is that you may want your product to be known for its quality, rather than just being the cheapest on the market. If so, I recommend that you price your product higher to reflect it’s quality. During a downturn, you may have other business priorities, such as sheer survival, so you may want to price your products to recoup enough to keep your company in business.
“There are many methods available to determine the ‘right’ price. I recommend that you use a combination of tools and know the key factor to consider is always your customer first. The more you know about your customer, the better you’ll be able to provide what they value and the more you’ll be able to charge.”

 

customer2. Know Your Customer
Undertaking some sort of market research is essential to getting to know your customer. This type of research can range from informal surveys of your existing customer base that you send out in an e-mail or using social media, to the more extensive and potentially expensive research projects undertaken by third party consulting firms. Market research firms can explore your market and segment your potential customers very granularly — by demographics, by what they buy, by whether they are price sensitive, etc.. If you don’t have a few thousand dollars to spend on market research, you might just look at consumers in terms of a few distinct groups — the budget sensitive, the convenience centered, and those for whom status makes a difference. Then figure out which segment you are targeting and price accordingly.

3. Know Your Costs  pie_chart_dollar_sign_pic
A fundamental tenet of pricing is that you need to cover your costs and then factor in a percentage of profit usually in the 35-50 percent range. That means you have to know how much your product costs to produce, ship, and sell. That may depend on your business. Restaurants overall make about 4 percent and grocery stores any where from 1.5-3 percent which is a fairly low margin. If you want 10 percent then you factor that into your costs and that is what you charge.
You also have to understand how many of your products or services you need to sell to turn a profit. Remember, the cost of a product is more than the literal cost of the item; it also includes overhead costs. Overhead costs may include fixed costs like rent, utilities, insurance. There are also variable costs like shipping or stocking fees. You must include these costs in your estimate of the real cost of your product. If you are a member of the Small Business Academy go to the Downloads section you will find a Budget Creator that will help you easily create a complete financial picture for you business and make sure you are covering your costs and identify your profit margins.

 

Icon 8

Next week we will cover the last three keys to correctly pricing your products and services. In the meanwhile, go over the three steps we have covered this week and start to implement what you have learned so far and we will finish up this section in next weeks post. If you need help putting together your own expense sheet or don’t know what your profit margins should be, please feel free to post any comments or questions below. I read them all and I answer as many as I can personally.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: