One of the first lessons I learned when I started my business is that setting prices, especially for a service business, is quite difficult, especially when you’re essentially charging for your ideas, backed mostly by your reputation.
When it comes to pricing, there are many important factors to consider, such as sales channels, cost of goods, and competitor pricing. But, just as important is how well you know your target audience and how much they value what you offer.
Here are five pricing strategies to keep in mind as you grow your business.
1. Understand Your Market Price
Correctly pricing your product or service starts by determining the market price—the current price your product or service can be bought or sold. An economics professor will tell you the forces of supply and demand influence market price. The price at which quantity supplied equals quantity demanded is the market price, and because supply and demand are fluid, market prices change quickly. Factors such as employee wages, world events, and natural disasters all impact market price. Just look at how the recent pandemic disrupted the supply chains and affected food pricing on dairy, meat, and fish products.
Start by researching market trends in your industry, market demographics, and supply and demand. Check with your industry trade association—they should have valuable information for members. Also, Google Trends is an excellent resource about popularity trends over a specific time period. Risk Management Association (RMA) Annual Statement Studies are available at libraries or online and provide benchmark financial ratios for businesses in over 370 industries.
2. Cost of Goods Sold (COGS)
Calculating the direct costs of producing a product (COGS) ensures you are not pricing your product too low or too high. Include the cost of materials, equipment costs, utility costs to run equipment, shipping costs, and labor directly utilized to create the product. You then add other factors to that total to establish a profit margin. Research what the average markups are for your industry. When pricing a service, look at standard industry practices, plus market prices.
3. Sales Channels
Pricing also depends on your sales channel (or channels). Sales channels are how products and services are distributed to the customer, such as:
- Business-to-business (B2B): Selling products or services directly to other businesses.
- Business to consumer (B2C): Selling products or services directly to consumers or stores.
- Distributor: Selling to a wholesaler or distributor who then sells to retailers.
- E-commerce: Selling online.
4. Competitor Pricing
The amount your competitors charge for the same or similar products and services is a vital factor in your pricing strategy. Should you charge less, more, or the same? If you’re just starting, it’s difficult to charge more than your competitors unless you are offering something genuinely unique. In that case, you can take customer value into consideration (more on value later). Finding out the competitions’ prices is as easy as a quick internet search, but there are other factors to consider when comparing competitor pricing:
- What sales channels do your competitors use?
- How large are the companies? How many employees do they have?
- Where are your competitors located? How many locations do they have?
- What are your competitors’ branding strategies? Do they position themselves as high-end or low-cost leaders?
- How do the features and benefits of your competitors’ products or services compare to yours?
- What are your competitors’ pricing strategies? Do they offer bundled services or products for a discount? A subscription or member plan?
5. Understand What Customers Value
To define and measure customer value, you need to look at a product or service in terms of the benefits (technical, economic, social) a customer receives in exchange for the price they pay. Therefore, by this definition, lowering or raising prices does not change the value offered—instead, it changes the customer’s incentive to purchase the product or service. Part of your pricing strategy should be to note all the ways your products or services offer value, whether it’s solving an accounts receivable issue for your business client or satisfying a demand for vegan cookies. Understanding your value also contributes to your marketing strategy as you tout your value points to the market.
Keep an Eye Out for Reasons to Adjust
As market trends change, it’s vital to consider whether your pricing needs to change also. Make sure you continuously monitor customer demand, the sales and pricing of your existing competition, and any new market entrants. Revisit your product or service’s value elements, as well. Then, when you’re ready to invoice customers, let Bill.com take care of the details and help you get paid faster so you can spend more time helping customers and clients.