While many strategies can help you determine the right price for your product or service(s), the key to achieving success is to use a combination of strategies and tools, and most importantly, put the needs/priorities of your customers first. The more you know about your customer, the better you’ll be able to provide what they value, and the more you’ll be able to charge. So, here are some factors to consider when setting the right price.
Know your Customer
Conducting some sort of market research is one way to know your customer. It allows you to tap into their psychology, to understand their interests and their lifestyles. You can conduct market research via mediums such as informal surveys on your existing customer base that you send out in emails, along with promotions to the more extensive and potentially expensive research projects undertaken by third party consulting firms.
You can either hire market research firms to do the work for you or identify your customers yourself or segment them into different groups – the budget-sensitive, the convenience-centered, and those for whom status makes a difference. Then figure out which segment you’re targeting and price accordingly.
Know your Costs
An important factor to consider when pricing is to ensure that you cover all costs and then factor in a profit. This means that you have to know the cost of your products. You also have to understand how much you need to mark up the product and how many you need to sell to turn a profit.
Please note that the cost of your product or service is more than the cost of the item, it also includes overhead costs such as rent, electricity, shipping of items from suppliers, stocking fees, and so on. You must include these costs. Remember that the cost of a product is more than the literal cost of the item, it also is in your estimate of the real cost of your product.
Many businesses make either of these two mistakes: They don’t include all their costs and underprice or include all their costs and expect to make a profit with one product and, therefore, overcharge. The rule of the thumb here is to make a spreadsheet of all your monthly expenses such as:
- Your actual production costs, including labor, marketing/advertising costs, and the cost of sales of the products.
- All operating expenses spent to own and operate the business.
- All money borrowed (debt service costs).
- The salary you pay yourself.
- A return on the capital you and any other owners or shareholders have invested.
- Capital for future expansion and replacement of fixed assets as they age.
List the amount in Naira for each on your spreadsheet, the total should give you a good idea of the gross revenues you will need to generate to ensure you cover all those costs.
Know your Revenue Target
If you don’t have a revenue target, you need to ask yourself why you’re in business. You should have a revenue target or sales goal you are aiming for. To achieve this, take that revenue target, add in all your operational costs highlighted above, and you’ll be able to achieve a price per product or service you can charge.
However, if you’re selling a single product, calculate the number of units of that product or service you expect to sell over the next year. Then, divide your revenue target by the number of units you intend to sell, and voila! You get the price you need to sell the product to achieve your revenue target.
If you have different products or services, simply allocate your total revenue target by each product. Then do the same calculation I highlighted above to get the price at which you need to sell each product to achieve your financial goals.
Know your Competition
Imagine going into the battlefield without knowing who you are sparring against. Dumb, right? Believe it or not, the marketplace is a battlefield and if you aren’t smart, you’ll get trampled upon even before you begin to take baby steps. Therefore, ensure you do your due diligence by looking at your competition. Your customers will also do the same, after all. Ask yourself if the products offered are the same as yours. If so, you can use their pricing as a guide for yours.
Then, look to see whether there is additional value in your product. For example, does it provide an additional service or is the quality top-notch? If yes, you can increase your price. Remember to also factor in regional differences and include your costs as well.
Do you, for example, offer additional service with your product, or is your product of perceived higher quality? If so, you may be able to support a higher price. Be cautious about regional differences and always consider your costs.
Keep Track of the Factors that May Impact Future Sales of your Products
While you aren’t a soothsayer, it is also important that you keep track of factors that would greatly impact the demand for your product in the future. These factors can range from something as simple as long-term weather patterns to economic/business laws or even competitors and their behaviors.