Key Considerations When Developing A Pricing Strategy

September 1, 2018

Do you have a pricing strategy?

1. Understand Your Product

One thing which is a classic downfall of developing a pricing strategy is that people do not always fully understand their product. It isn’t as simple as thinking this car is a car or this chocolate bar is a chocolate bar. You need to know the true value of your product, we are all guilty of thinking what we have is the best thing since sliced bread. However, that does not always balance with what the customer perceives.

Another thing in understanding the product is that you need to know its capabilities and its limitations of your product, if you can on sell from your product such as getting additional ongoing software sales then you can price lower as you can make up revenue and margin long term. If your product is a one-off purchase with little to no chance of future sales in the near future you should consider holding firm on your pricing as you will not make up the loss in margin any time soon

2. Know The Costs

A line which I was told at a very early stage of my career was that ‘top line is vanity bottom line is sanity’. This means is all comes down to actually making a profit. You could have £15,000,000 worth of sales but if you make a loss on the bottom line you are worth less than a company with £10 of sales with a £1 profit.

The cost of the product isn’t what you need to consider when developing your strategy it is about what the cost of business is. You need to consider all the costs that affect your business, you may be making a £100,000 margin on your sales but if your rent is £110,000 you will not be successful.

You can always look to minimise your costs if you have a large amount of seasonal sales by using temporary staff and outlets which mean you won’t have ongoing costs throughout the year. I would try to never cut costs which may affect the quality of a product as that will bring down your ability to charge a higher price. You can always make a better margin in peak times if you have skilled buyers who can work in the economy of scales to drive down base costs on the product

3. Know How To Accurately Forecast

No one can see into the future but one thing you can do is use the information available to be a accurate as possible. Run rate is a favourite for many as they can use the last 3-6 months to see the trend of their sales. If you are reliant on short term contracts this can be harder sometimes and it would be important to work with more flexible margins. Knowing what everyone else is doing will be a big factor when it comes to forecasting as if a new competitor is coming into the market and throwing a lot of weight behind their campaign that could give you a dip in sales even if you have been having a positive run rate.

Knowing your market is crucial when forecasting. Some products which generally are luxuries can sustain sales throughout the year such as motorhomes where as many service based industries such as hospitality can fluctuate depending on weather and when the pay day falls.

4. Match Your Pricing To Your Business Plan

When a business plan is developed you can spend weeks, months or even years in some cases developing the perfect plan for your business. You will have meticulously looked into every facet of the industry and set out your targets of the direction you want to take your business. To get to these targets pricing is absolutely key. You may be looking to do introductory offers to generate sales and get your product out there which may in your first year give you a poor margin and with your new business investments you have made may lead to a loss. This can be expected in many businesses but if it doesn’t match up to your business plan then you have no overall strategy going forward.

If you are working with a grant and you have made certain commitments to developing a business you need to ensure that these are met so your pricing needs to balance the risk and reward.

5. Understanding Market Forces

The dictionary definition of a market force is ‘the economic factors affecting the price of, demand for, and availability of a commodity.’ This is without a doubt one of the most important things to consider as you need to know the value of everything. If you provide something that is low in supply but high in demand then you can charge what you want as your product or service is sought after.

If you have a product low in demand you need to consider how you can justify the value of what you do. With this, you need to make your product attractive to the potential buyer. Dropping the price of your product is not always the best thing to do in this situation as you make yourself busier but you might just make yourself a busy fool. Investing in marketing your product and maintaining a better price may be the way forward as you may become busy from price dropping but having extra background costs in labour, production combined with a lower GP could leave you no better off or potentially worse off on your bottom line.

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