Monday 03 April, 2017
Pricing is a tricky part of running your own business. It’s a set of decisions that has a huge influence on sales and profits. It affects not only your company’s finances but also how your customers see you. This is not a decision to be made lightly
Cost Plus Pricing – The Basics
The basic method for determining price is called cost plus pricing. Cost plus pricing means calculating costs and setting a price that covers costs while also giving you a bit of profit. That ‘bit’ is entirely up to you, of course.
The logic of cost plus pricing is self-evident. If you sell too low, you’ll lose money (or the profits will be so small they won’t be worth your efforts). If you sell too high, people will buy somewhere else, unless your marketing is kicked into really high gear and you can convince them to pay more from you.
There are two types of costs to consider in cost plus pricing – fixed and variable. Fixed costs are things that never change, like the cost of materials, rent on your space, and so on. Variable costs are things that depend on how much you sell, like inventory storage space, overtime work, shipping costs, and so on.
Examining the Market
Cost plus pricing is the most basic way to determine pricing but there are other factors to take into consideration. Before setting your price, you should check out the competition. How much are they selling their similar products for? The price may be higher than it would be with cost plus pricing.
You can then decide whether you’d like to raise your prices to match the competition or undercut them. A factor here is what the market is doing. In a good, stable market, the products will sell for about the same price everywhere. In some markets, there may be wild fluctuations with some retailers selling drastically lower or higher than others.
Your Unique Value
Look at your products and compare them to others on the market. What is the unique value your service offers that others don’t? If you can pinpoint something unique here, you may be able to charge more.
It may not be that your products are unique. Maybe you have a loyal following or you appeal to a specific segment of the market that others don’t. In this case, you don’t need to offer the cheapest prices because you offer some unique value others don’t.
No matter how much you decide to charge, tiered pricing is always a good idea. Tiered pricing means offering your customers choices at different price points. They can choose the option that matches what they’re willing to pay.
This is not only a good thing for your customers but also has benefits for you in addition to increasing sales. It’s a good way to discover your market’s tastes. You may find that one option outsells the others. You also have the opportunity to upsell from one tier to the next.
Eventually the market balances out and finds the right price. It may take some trial and error with different pricing strategies before you find the one that works for you.