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Effective Product Pricing Strategies

Simple Alliance, Kenya Limited


Pricing Key to Business Success

Your selling price always impacts on the success of your business. Most business owners however lack the knowledge of instituting proper pricing strategies. This deficiency means that the business owners randomly pick selling prices after computing basic production costs. The downside of this pricing approach is that you could derive arbitrary results. 

Effective Pricing

For effectiveness when pricing a product, you need to take into consideration every relevant factor. Such factors include:

  • Your customers’ expected purchase prices
  • Your production expenses
  • Your desired corporate image

Key Factors

To arrive at an affective price, you need to consider various elements, namely:

  • Fear of losing out after delivering the project
  • The costs to incorporate into your pricing  
  • Pricing formulas and their applicability
  • Your consumers’ expected buying price
  • Whether to adopt hourly or project-based charge rate
  • Setting suitable wholesale prices
  • High versus low pricing dynamics
  • Suitable avenues for netting new lucrative clients 

Relevant Costs

Apart from direct expenses such as labour, cost of goods sold, and supplies, you need to incorporate relevant indirect expenses. Some common indirect costs include: 

  • Your time
  • Equipment and furniture
  • Consultant levies
  • Stationery  
  • Transport and travel expenses
  • Magazine subscriptions
  • Software
  • Fax and telephone expenses
  • Professional organisations’ membership fees
  • Printing
  • Postage fees

Determining Proper Wholesale Prices

When setting your wholesale prices, you need to manage two crucial factors, namely.

  • Your customers (retailers) need to add their profit margins into your price and still sell
  • Retailers will promptly move to your lower priced competitors 

Suitable Strategies

Your wholesale pricing approach will be guided by your desire to:

  • Be an attractive match to your competitors
  • Allow creditors to make suitable profits   
Matching Your Competitors

So as to remain a relevant competitor among players in your industry, you need to conduit some research. Major avenues include:

  • Visiting retailers’ premises and calculating wholesale prices by halving the retail prices   
  • Investigating competitors’ prices by attending trade shows, asking them for price quotes, and consulting trade organisation
  • Asking retailers the identities of their suppliers and their purchase prices    
Permitting Your Retailers to Make Suitable Profits

Retailers need to recoup their purchase costs and also earn some profits. They usually add the profit figure onto your selling price so as to arrive at the retail price. To determine the prices your creditors expect to pay, you could consult retailers’ associations. These organisations will inform you of the usual mark-up rates.        

The Applicability of Pricing Formulas

You could pick from two common pricing formulas, that is:

  • Doubling wholesale price
  • Adding overheads and direct costs to your expected profit figure   

Downsides of Pricing Formulas

Though potentially useful, pricing formulas have certain disadvantages. While determining your selling price, they fail to:

  • Incorporate the ‘psychological’ element of pricing since customers do not always fall for lowly-priced items  
  • Incorporate every hidden expense and related factors
  • Take into account that your selling price is hinged on your customers’ expectedness or willingness to buy

Low versus High Pricing Dynamics

You could decide to lowly or highly price your wares.

High Pricing

Your high product prices need to be backed by added value. If you already offer added value, you may need to make your customers know about this. Alternatively, you could introduce added value frills to your wares. Key value additions include providing:

  • Extra products, resources or services    
  • Online services
  • Additional features
  • High quality

Low Pricing   

Your pricing strategy could dictate that you offer few add-ons so as to capitalise on your profits. Such an approach is however not advisable.  it puts your small business in the operating spectrum of large entities that could easily cut prices due to immense purchasing power.    

Customer’s Anticipated Buying Price

After computing your production expense figure, you need to establish what your peers are charging for comparable services or products. Apart from price, conduct research to determine other aspects that customers consider when making purchase decisions.  You may need to call or visit your competitors. Among the elements you could look at include whether or not your competitors: 

  • Have an open-minded return policy
  • Offer personalised attention to consumers
  • Provide free delivery services

Project-Based or Hourly Billing Rate 

Your decision of whether to bill your customer by the project or by the hour depends on various factors, such as:

  • Prevailing circumstances
  • Industry standards    

Prevailing Situations

You need to make several considerations with regard to circumstances.  Some important elements include:

  • Your client’s leeway to request for revisions
  • Your client’s likelihood to reject seemingly high prices  
Customer’s Likely Disagreement with an Apparently High Price

If you are aware of the time you’d take to complete a project, it is better to adopt project-based billing. For instance, a task may only require you to out in 3 hours. Your client may not be aware of this completion time. if you are not sure of the exact completion time, you could conduct research among your peers. In such a case, you would satisfy your client by quoting a flat fee.      

Revision Provisions

In case your customer is likely to ask you to revise the project before or after completion, go for hourly billing. if you charge by project, you may have to endure additional work with no pay while conducting the revision. Hourly billing will appropriately compensate for the hours you put into revising the project.  

Appropriate Ways for Catching new Profitable Clients 

So as to forge a good relationship with a new customer, you could lowly price your wares. This strategy is however counterproductive. Your customers get used to your low prices. This conditioning prevents your clients from anticipating price hikes. You thus need to devise suitable ways of attracting new customers. Key approaches include offering:

  • Value added features
  • Excellent quality services and products

Post-Project Loss Anxiety

You may be concerned that your client will default after you finalise a project. This fear is especially rife among service businesses.  Once you complete a service project, it is usually impossible to reverse the service. To manage this valid fear, you could ask your client to show their commitment by paying in appropriately staggered instalments. Usually, the instalment formula is:

  • 30% at contract signing stage
  • 30% half-way through project
  • Remainder after completion   

Pricing is a significant determinant of the success of your business. You thus need to steer away from the common trend whereby businesspersons merely compute their basic expenses and then arbitrarily pick selling prices. This pricing strategy is likely to be problematic as it does not comprehensive factor in all crucial elements. For effective pricing, you need to consider all relevant aspects. Major factors to consider while pricing a product include your customer’s expected purchase prices, your production costs, as well as your desired image. Your pricing method could see you evaluating a number of important issues. You could consider the suitability of pricing formulas. Your pricing task will need you to determine and incorporate all costs – direct and indirect.  You might as well weigh between project-based and hour-based billing alternatives. You also need to determine how to suitably set wholesale prices. Especially if you operate a service business, you could consider the possibility of client default on project completion. If you desire to net in a new client, you need to carefully evaluate whether low pricing will help to attain your objective.

Copyright (C) 2016, Simple Alliance Kenya Limited

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