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How To Set a Price That Will Rock Your Sales

Ritu

June 27, 2008

Pricing, as we all know, is one of most important factor when it comes to making a sale. A product with a higher or lower price than what it is wroth is bound to take a business downhill. Setting a right price on a service and product can be quite challenging as our main focus while running a business is to generate profit, and profit comes from successful sales, and sales comes from products and services that are priced just right.In this post, I would like to share what I learned about setting price while I ran my own business. I used to run a small residential cleaning business couple years ago which I sold for quite a profit after two successful years of operation. One of the reasons, I think, the business was able to compete and grow at such a fast pace is because of the right pricing. Let us analyze some of the things that can help us set a right price and leverage sales and generate profit.

Set a Realistic Pricing Goal

The first and most important approach to setting a right price is setting a pricing goal that is justifiable by the customers. We all want to make and sell products that are low in operating costs but earns higher return on investment (ROI). It certainly would be nice to sell a product that costs us only $50.00 but sells for $100.00 giving us a profit of $50.00, but this is unrealistic in most cases.

We need to set a realistic goal at the very beginning by analyzing the customers that we are trying to reach. If our target market is middle class and we are developing product whose price range is more suited for the higher class, it most probably won’t earn you much return on your investment. Analyze your market and see what is realistic. Will this price be seen as reasonable by customers? Is it the right price for this product? If I were to walk in a store would I be willing to buy this product at this price? Does the price justify the products actual value? These are some of the question that will help you set a realistic pricing goal to start out with.

Analyze Demand, Cost and Profits

Another very crucial step is to analyze the demand of a product, costs associated with it and what’s in it for you. Lately ebay seems to be all the rage for making money. Most people fail to realize that although ebay has a wide market, not every product has high demand. If you purchase something for 100 dollars without analyzing the demand within that market or category you might not even get what you paid for. A product might be one of kind, pioneering and extremely useful but if it’s not in demand it won’t do you any good.

For the price to be right you have to see how the market acts upon products similar to yours. Is it something that is widely desired? Is it a necessity? Are your costs low enough to earn you any profit? These are some questions to think about before jumping into setting a price for a product or service. Pricing on a product or service can substantially boost your sales or dump your business down the drain.

Choose a Pricing Strategy

Let’s analyze two types of price strategy that most businesses seem to apply,

Price Skimming or Market Plus : This pricing strategy is mostly suitable for businesses that are already established. Businesses that have been able to gain recognition from consumers with their past products are more likely to use this kind of strategy in setting up a price.

Price Skipping or Market Plus is a pricing strategy where a business sets the price of their products relatively higher during the roll out phase. The key aspect of this pricing strategy is to lower the price as time passes by so as to compete with others. This strategy allows firms and businesses to recover it’s sunk cost quickly. As said earlier this might not be an option for every business.

Penetration Pricing : I am personally all for Penetration Pricing. This pricing strategy is usually implemented by most businesses, both large and small. The key is to set the price of your products and services relatively low during the introduction phase. This allows the business to tap into the market quickly and beat their competitors when it comes to pricing.

Although penetration pricing is very effective as it helps you compete directly in terms of pricing, it doesn’t always yield benefits as expected. One of the biggest drawback of this kind of pricing strategy is lower profit margin. Since the key is to start out product sales at a lower price than what the market is currently running at, it is sometimes hard to make a profit. However, with clear planning this pricing strategy can yield great benefits and profits in the long run.

Analyzing the Entire Process

If you are a writer what do you do once you are done writing an article? You proofread! The same rule applies when setting a price for a product as well. Most businesses fail to realize that pricing is one of the key component of running a successful business. Just knowing your operation cost and desired profit alone does not lead to a perfect pricing. A perfect pricing includes future planning, market study and everything else related to the business.

Once the price for a product is set, the key is to go back and analyze. I can bet you will find some loopholes while you go through the entire process.

This post is by no means comprehensive when it comes to setting a right price. We will try and explore more as we go along. Meanwhile, please share what your strategy is in setting a price for your products or services?

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