What should I charge?
Wondering how to price your products?
Today I’ll tell you what you need to price your products and services strategically. Read until the end and I will give you a strategy to apply today so that you can start setting better prices.
First, we need to define what price is? Your price is the amount of money you will accept in exchange for a product or service you offer. Each product or service has a price where the buyer receives what they want, and the company receives a profit.
The goal is to offer the customer the highest value for their dollar now. If there is a better value elsewhere that the buyer can wait for, you will have lost the sale. The price isn’t what truly matters in this scenario, but it is actually the value that matters the most.
Price vs Non-Price Competition
One of the first things a seller should do when deciding to price a product or service is to decide if they will compete on price alone or a combination of factors. When I was a young logistics broker, I found that if I could offer clients a bigger sense of relief, they would be more willing to pay my price. They valued knowing that their shipment was safe with a carrier that they knew and had a relationship with. I wasn’t convincing my clients that I had the lowest prices, instead, I focused on giving them the most peace of mind and stability.
So, what is non-price competition? This is a type of competition that is based on factors other than price that can include distinctive product quality, customer service, promotion, packaging, and any other feature that your product or service delivers.
For example, Chanel doesn’t price their products based on the cost to make their goods. They charge for their image and what it represents to the world. They market their products to individuals who appreciate and find value in their mission:
Chanel Mission Statement:
To be the Ultimate House of Luxury, defining style and creating desire, now and forever.
This makes the buyer feel as though they are buying into an exclusive tier/class of people, who appreciate this mission to define culture. These are compelling emotions that make buyers loyal and committed to the brand and what it represents. These buyers are more willing to pay a higher price because they feel more comfortable and relaxed with your brand.
There are benefits to competing based on your price, as well. While this isn’t the best approach to earning business, this is an easy way to get a foot in the door with a big client or price-hunting customers. If you try this approach, it is important that you look for a way to offer a unique value to your customer. This will help prevent you from being blindsided by another product or service that is priced lower than yours.
5 Pricing Objectives
There are different goals behind choosing your price and these are your pricing objectives. You’ll need to price to make a profit, but you also can price for your organizational and marketing goals. If your goal as a company is to simply survive, then you will be more willing to take a loss to earn a customer. Your organizational goals are the why for your prices and these need to be clearly defined. Here are examples of each of the five pricing objectives:
1) Survival
In the transportation industry, it is normal practice for companies to take large losses in the beginning stages of a relationship with a client, with the hope that more business will come in the future. This is an example of the survival tactic in pricing, where a company will cut its price to attract customers, even if they will be operating at a loss.
2) Profit Maximization
Shoe companies are notorious for their use of cheap labor to make large volumes of high-cost items. While some of these companies operate on the right side of the moral compass, others will charge $100+ for a pair of shoes, that costs $8 to make. This is a way to maximize the return on a product (investment) and maximize the profit.
3) Target Return on Investment
If you own a record label and you decide to invest $10 million into a new album from Kanye, you will need to set a target amount of money that you want back from that investment. This amount would usually be in addition to the $10m that you invested. This goal is your Target Return on Investment, the price you set for products to reach your target return.
4) Market Share Goals
A company’s market share is its ratio of total industry sales. Microsoft (Xbox) and Sony (PlayStation) are constantly fighting for market shares of the video gaming market. Each company is looking for an edge that would convince buyers to purchase their games over the other and this leads to aggressive pricing and other marketing efforts that help them gain shares of the market.
5) Status-Quo Pricing
Even though milk farms have similar products, oftentimes you see that their prices are also similar. These companies don’t focus on under-cutting one another, but instead, they price to be in line with the status quo. Pricing this way means that you are comfortable with the prices that are on the market for your product.
Conclusion
When you are deciding what to charge for your products or services, you need to have a clear understanding of your objectives for pricing. This will help you retain customers and offer the highest value for your product or service. Select your pricing objectives and define your pricing strategy. This is an area that many people question, and I hope you have found value in this walkthrough of my process that I have and continue to use. If you want more helpful information I have found on the topic of pricing, check out a few of the articles below.
Additional Sources
Why You Are Undercharging Clients