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Are you setting the right price?

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Setting the right price for your products and services can be a challenge. You will naturally want to maximise the profit you make from each sale, and set prices at the highest possible point before demand begins to wane. However, there are other factors to consider when deciding on the most appropriate pricing structure for your business.

Considering the ‘bigger picture’

Setting prices is most often driven by profitability. However, many other factors could come into play that may impact upon your pricing decisions. You may also wish to increase market share or grow sales. A relatively simple method of pricing is to calculate the costs involved and add a profit margin. However, it is essential to factor in all of your costs, whether direct or indirect. You should also consider your competitors, current market trends and the needs of your customers.

Some different approaches to pricing

There are a number of alternative approaches to creating a pricing structure, some of which are outlined below.

Target costing

This approach involves deciding upon an optimum selling price from the outset, and subtracting your desired profit. This generates a ‘target cost’ that can be communicated to employees, who can then be tasked with meeting this cost. This approach may work where production costs are relatively fixed.

Price skimming

This method may be used where a business is the first to bring a new product or service to the market. Price skimming allows a business to capitalise on this fact by setting a higher price with a greater profit margin than normal, thereby making as much profit as possible before competitors develop similar products.

Penetration pricing

Conversely, penetration pricing involves initially setting a lower price in an attempt to incentivise customers and boost market share, before subsequently raising prices.

Price matching

Price matching involves setting your prices to mirror those offered by your competitors, without seeking to undermine the 'going rate'.

Predatory pricing

Under this strategy, prices are set so low that competitors are unable to match them, resulting in them losing business. However, this method is considered rather high-risk.

Factoring in the competition

It always pays to keep an eye on your pricing in relation to your competitors. Consumers searching for a product or service will naturally seek out the ‘best’, or lowest, price available to them. This can make it difficult for smaller businesses to compete with larger firms, who are able to mass-produce items with ease.

Small businesses may instead wish to concentrate on other areas, such as perceived quality, customer service or the uniqueness of their offering. If you decide to market your products or services as premium or luxury, clients will expect to pay more, and a relatively cheap price may do more to harm sales than improve them.

You may also want to set different prices for the same products or services based on different customer groups, geographical location or seasonal factors.

It is generally not advisable to enter into a direct 'price war' with your competitors. Doing so without adjusting the value of your product or service will only erode margins.

Adapting to changing client needs

Successful companies continually assess how economic trends and market changes are affecting their clients. It is advisable to carry out thorough market research before setting a price for your product, including contacting customers directly and seeking their feedback.

When it comes to setting the right price, it’s essential to consider your main business objectives, and to be responsive to the changing needs of the marketplace and your clients.