As innovative and promising your product or service may be: In the end, what truly matters is the price. It must be designed in such a way that all parties involved are satisfied. Pricing may sound simple yet presents a great challenge in everyday life, especially in times of inflation.
So, you have a great product or a fantastic service to offer. For months, maybe even years, you have been tweaking and calculating. Now it is finally time to introduce it to the market. For that, however, a price is needed. What is important to consider when setting prices? How do you choose the best price, both for yourself and for your customers?
Pricing has many objectives. The main goal is, of course, to earn one’s own money. Customer satisfaction and value for money should also be high on the list. Good pricing can attract new customers or increase the loyalty of existing customers to your brand. Thus, pricing is one of the most important aspects of marketing.
Finding the perfect price is practically impossible. There are always parties who cannot be optimally satisfied with the price. What matters is finding a good compromise. The following three factors in particular play a central role in pricing: Operating costs, competitive environment, clientele. We present the most important ones in the following text.
Operating Costs
Probably the best-known factor is the operating costs. The expenses for production determine the price of the product or services. However, the price should not only be based on the raw value of goods. After all, other costs are incurred in production, such as any rental costs and costs for labour and logistics, as well as distribution and marketing costs. Furthermore, charges such as taxes, social contributions, etc. should also be taken into account. Such pricing is also called “cost-oriented pricing”.
The operating costs are calculated as follows:
+ fixed costs (Costs that remain unchanged regardless of the situation, such as, rent, fees, interest)
+ variable costs (Costs depending on the case, such as those for goods, materials, or third-party services)
+ profit mark-up
+ VAT
= selling price
Small start-ups and SME often focus on cost-based pricing, as this variant is easy to implement. However, the other two factors must also be considered, otherwise you could miss the mark with your price.
Competitive Environment
Your price must be adapted to your competitive environment. It cannot be too low or too high in comparison, which is why you should keep an eye on your competitors’ prices.
To learn more about your competitors, you need to conduct market research. Compare your price with that of market-leading companies or calculate the average price of all suppliers. You can then include these figures in your pricing.
Clientele / Buyer Intent
In the end, the most important factor is the clientele. Entrepreneurs therefore must deal intensively with their target group. The decisive factor is the customers’ willingness to buy. How many would pay for your product or service? How often would they pay for it? What price would they pay? What is too expensive for them?
The lowest price is not necessarily the most attractive. Often a higher price is associated with higher quality and, conversely, a lower price can indicate lower quality. Furthermore, the price should not fluctuate too often. Once the price has been lowered, or even repeatedly, it becomes rather difficult to raise it again.
Ultimately, one’s own corporate goals must also be taken into account in order to define the right pricing strategy. If your goal is to squeeze out as much profit as possible, you could set the price higher. However, if your focus is on growth, consider setting the price rather low in order to strengthen customer loyalty.
Instruments for Pricing Policy
Once the price has been set, you can convince your customers to buy with the targeted use of purchase incentives for little effort.
The following strategies are used for this:
- Psychological effect
Probably the best-known measure is the psychological effect. Especially for products and services in the lower price range, the use of psychologically adjusted prices makes sense. Label your price e.g., as CHF 49.90 instead of CHF 50. The difference is insignificant for you, but your buyers will perceive it to be lower and be more likely to pay for it.
- Incentives to buy
The chosen price does not have to be set in stone. Depending on market development, various temporary incentives can lead to purchases. The advantage of such incentives is that they strengthen customer loyalty and attract new customer groups. Besides, you can use such incentives again and again:- Discount / Action
- Sale
- Quantity discount
- Subscriptions
- Membership
- Financing models
If the product or service is in a higher price range, it might make sense to offer financing models such as instalment payments, cash discounts, leasing, etc. To this end, it is worth comparing financing models available on the market and offering similar variants.
A Good Business Software
Price is not the only decision entrepreneurs have to make. Atlanto wants to help you with all of them. Read other blog posts to learn more about the challenges of entrepreneurship. Why not try our Business Planner as well, which can help you with your business’ initial planning and organisation.
