Determining how to price your product or service is critical to success.
When you are considering what to charge your customers, it’s important to know your costs by:
- Gross margin by item
- Volume of sales by item
If you have multiple items in a product line, each item could and usually does have a different cost to manufacture or produce. When you know the costs, you can set a price that doesn’t hinder your profit and makes the most of your profit margin.
Outsourcing your accounting gives small- and medium-sized organizations access to the expertise and depth of knowledge of an accounting team and Virtual CFO.
When you are aware of the costs associated with doing business, you can strategically put your energy and focus on the items or services that earn you the most profit.
Why work hard to move things that earn you minimal return? You’ll achieve your business goals more quickly by marketing the items that are most in demand that earn you reliable returns. You can also choose to earn profit by selling volume at a lower profit margin or less volume at a higher profit margin.
The right pricing strategy is going to ensure that you are covering your costs and meeting your business goals. It’s also going to determine how much your customers will pay for your product or service.
The price point you set needs to do a few things. First, you need to demonstrate the value of your product or service. Things that are priced too low could make people distrust the quality.
When you figure out pricing, you’ll want to hit the sweet spot. Too high or too low may prompt customers to go elsewhere for what they perceive to be top quality at a competitive price.
It pays to understand your market and target clients. Are they looking for value or luxury?
Pricing strategies are all based on a combination of math, market research, and understanding your customer. Here are some of the most common pricing strategies:
- Value-based pricing: The price determined by knowing what consumers feel the product or service is worth. Consider a professional services company knowing that people are willing to budget and pay $X annually.
- Economy-based pricing: If you are selling commodities, there is a market for low prices. Pricing this way might help you sell more volume. A good example in the food production industry or manufacturing industry is generic brand versus name brand.
- Cost-plus pricing: You know how much it takes to produce the product or service and then price it by adding a percentage to that. It’s simple and is generally used for products like mechanical parts rather than services like telecommunications.
- Competitive pricing: If you’re not the only company offering a service or product, it can be helpful to set your prices so that they are in line with those of your competitors. For example, in the transportation industry, it’s important to know what your competitors charge.
- Penetration pricing: If you are new to offering a service or product that is already available, you can offer lower prices than your competitors to lure clients to try your business. The challenge is how to earn their loyalty and keep them around if/when you do increase the prices.
- Price skimming: You price your product or service at a luxury price point to target high-end clients, then lower the price (perhaps end of season) or offer specials to entice the more moderate consumers.
- Dynamic pricing: In some industries, costs to produce an item might fluctuate or customer demand could ebb and flow. The way you then price the product might change to reflect current costs or demand.
Figuring out the winning pricing strategy for your business can be tricky and it certainly does affect your bottom line.
Understanding the direct and indirect product and/or service cost, the overhead costs to run your business and determining your break-even selling volumes is extremely important when determining which products and/or services to sell and at what price.
Interested to learn more about having a virtual Accounting Team to help you with determining your pricing strategy? Please contact Finatics Accounting Solutions for a complimentary consultation.