What should you charge? What CAN you charge? Creating a winning pricing strategy is one of the fundamentals of marketing. It is, after all, one of the 4 P’s of marketing; product, price, place and promotion.
Let’s break down what pricing strategy might entail:
Evaluate your costs and determine your base price
Consider competitors’ pricing and your unique position in the marketplace
Test out your price strategies by talking with customers and prospects
Test out freemium strategies if your business model supports it. A freemium strategy is an entry-level free price, with added services or features that cost money. This gets your clients in the door for free, but allows them to upgrade to better services or features as they need them. Works best for subscription-based services or products like software.
Can you make money at it?
First, calculate your cost plus margin. At a base level, you need to make some money, right? Factor in all of your costs, from wages, to raw materials to shipping, packaging, fulfillment and overhead like office supplies, electricity, rent and marketing.
Divide by anticipated sales or current sales of similar products to get a per-unit price.
If you are starting a brand new business, you will need to create what’s known as a pro-forma – a business budget based on anticipated sales and expenses.
Are other companies making money at it?
Look at your competition, but remember: less is not always more! Being the low cost value producer is a strategy, but it has its risks. If you price your product too low, you will find it hard to EVER get it significantly higher in the future. You are better off starting with a higher price and offering discounts or even lowering pricing a little over time than to start too low. Articulate what you do better than anyone else. That has value. Communicate the value of your product to let the customer justify paying more for it.
Will the customer pay for it?
Do your research. You can ask customers (there are specific ways to survey customers about pricing that don’t automatically push them to choose the lowest price.) Asking your customers about what they are willing to pay for a new product is valuable insight, and with social media and digital marketing, it’s easier than ever to get feedback on pricing.
In the industries we work in, we have customers selling affordable products online, and customers selling very high value services online. Both have different strategies. In the craft and sewing business, pricing a sewing pattern is different than pricing fabric. Fabric is largely a commodity, with many vendors selling the exact same product that can be searched quite easily by the customer. Sewing patterns are less commoditized. There is uniqueness in each brand’s patterns (even if they might be the same thing, for instance, a wrap dress sewing pattern) that can be communicated and used to influence pricing strategy. Each designer drafts differently, tests differently, markets differently. But even with that, there is only a small variation, from free to about $25 per pattern (on the very high side.) The companies that release their products for free, often do so to gain a very wide audience of social media customers and followers in an effort to sell more as a value provider. Their costs might be lower, but they will find it difficult to go from $5 or $7 to $15 or $21 with their products in the future.
Companies that price their products between $15-25 have pricing and discount leeway – they can hold sales or offer bundle discounts because, overall, they are making more and covering more costs for, say, more testing, better drafting, or better instructions.
At the high end, companies that sell very high dollar value products and services, too, have pricing strategies. Are they pitching their businesses as the low-cost provider or are they focusing on a niche size of customer within their industry that they can charge more, but also provide more value? For instance, a software firm that requires customization during installation will be able to price their consulting services based on the value they provide, whereas a software company that doesn’t offer customization will not be able to charge additional fees and may need to charge more
Companies deploy “freemium” strategies for getting customers excited about their products before they charge them more for more services. This works well for high dollar value services that are ongoing. Want the basics? Free! Want more? That’ll be a $59.95 per month subscription. This model works best for technology, digital products and online communities with courses or premium downloadable content.
The best advice is to price in a range that keeps your margins profitable but also appeals to what your customer values your product at. If you’re providing high value, the price can be higher. If you’re providing lower value, the price can be lower. Value is perceived by the customer – so understanding your customer is critical for pricing products and services. There are always lower cost competitors, but the customer may perceive these as less valuable and is willing to pay more for better products or services.