Pricing

Pricing is an incredibly difficult – and important – part of running a business.  It can be the difference between success and failure.  The dilemma is:

• Price yours goods and services too high and you may lose sales and alienate customers
• However, price too low and you may not make sufficient profit to cover your overheads, which may lead to a loss.  You may also alienate past customers, or simply position yourself wrongly in the market (a low price may suggest a poor product, which can in itself lead to people discounting).  In short, you could end up very busy without making any money.

Pricing can also be very emotive and subjective, depending upon a range of individual factors.  So what do you need to be aware of when you are setting your prices?  The following are some of the more common issues you should take into account.

1. The market may determine the price

Look at what competitors are charging.  In certain industries, this may be the norm.  However, you have to decide whether this is a suitable strategy.  If you charge the same as your competitors, how will you differentiate yourself?  You may undercut, possibly leading to a price war, or you may decide to position yourself at a higher level and sell your offering as a premium product.

2. Make sure you cover your overheads

In the long term, any margin you make must, as a minimum, cover your overheads.  You also need to make a profit suitable for your requirements, in line with your business plan.  You may have a loss making business in the short term if, say, you are building the goodwill up.  However, if this is through having a lower price which then increases, you need to be aware of any price elasticity.  In other words, how price sensitive are your customers?  If you increase your prices, will they leave?

3. Cartels are illegal!

This may sound silly, but think about it: wouldn’t it be nicer and easier for everyone if you and your competitors all charged the same price?  No price wars, no need to discount.  However this is price fixing and is illegal.

4. There is only one winner in a price war

If you operate in a competitive industry and businesses keep under cutting each other, you could all end up with the same product costs and overheads, but lower sales income.  The only people who win from a price war are customers.

5. Price is only part of it

The marketing mix consists of the 4 P’s – price, promotion, place and product.  In addition to price, promotion is how you market your offering, place is where it can be purchased, and product is the selection of what you are going to sell.

The above points should hopefully make you think about the importance of pricing as part of your business strategy.