This doesn’t mean going out of your way to hire a market research team. Rather, start by doing some low-level market research. Scope out the marketplace and see what your competitors are doing, and how they are pricing products and services like yours. Your research should ultimately identify your competitors and give you a better understanding of where your business sits regarding pricing.
If you discover that your proposed pricing is far higher or lower than competing businesses, identify why. You be undercutting yourself, or your competitors may be offering a value-add, for example. When trying to understand how you are pricing your product against your competitor’s ask yourself the following:
Understanding what your competitors are doing puts you at an advantage when it comes to promoting and selling your product. There is a plethora of data available in public domains that will assist you as you research your market and competition.
Your aim is to ensure your business is turning a profit, so at the very least all your outgoings are covered. Look at your direct and indirect costs and work out how much of a margin you need to make a profit without putting off potential customers. The last thing you want to do is to set a price point that will lose the business revenue, and add pressure to your earnings.
Your pricing margins should take into consideration what the absolute minimum is for your business to survive — that is, the costs that must be covered for your business to break even. If you find that the prices you’re charging just to break even are too high compared to those in the market, then you’ll need to think about a new, cost-cutting approach to make your product or service financially viable.
Testing your pricing is a great strategy to ensure you are setting your product or service at the correct price point before advertising your offering to the public at large. Rather than going straight to market and adjusting the price later, consider launching a selection of products or services on a limited release and track the results.
Many businesses do go straight to market and adjust their price points later, however there are risks associated with this. Testing the market allows you to quickly pivot if things don’t go according to plan. If you launch a product or service on a limited release, you’re selling a set amount – meaning you are in control of how much you sell, which reduces financial risk.
Testing the market also allows you to analyse how much it costs you to sell the product or service, taking into consideration marketing, materials and your time. Using this analysis, you can then decide whether you want to price the product higher or lower. If the offering didn’t sell out, or it took quite a while to gain traction, you may want to lower its price. However if the offering sold out quickly, this might indicate you could increase the price to meet demand.
Focus groups are also an option, if you’re looking to see what the general public’s reaction to your product or service is going to be like before launching your business. If you have the time and money, focus groups will allow you to develop a better understanding of where your product sits with consumers and the group’s overall view of the product, as well as that of the individuals who participated. Focus groups can also help to narrow down and better understand your key demographic, which allows you to refine and tailor your sales techniques to that specific group of people.
Getting your prices right is a fine balance between research, number crunching and testing the market. You don’t want to turn customers away by selling something at a high price that is unaffordable or can be found cheaper elsewhere, yet you don’t want to sell yourself short and lose revenue. If you run an existing business, you may want to consider raising your prices as part of your business growth strategy. You’ll need to find the right time to do this, and decide how best to communicate that price increase to your customers.
Setting price points and reflecting on your business plan and any research that you have done is an effective strategy to ensure your business is well-adjusted to the current market, and keep an eye on what your competitors are doing. For more resources and advice on your business needs, head to the Zeller Business Blog.