The prices you charge for your products can have a dramatic effect on sales and profits. Setting your prices too high can reduce sales abruptly, while undercharging can devastate your profits.
The logic is simple. Your optimum price is one that gives the largest total when you multiply your margin by the number of sales you can achieve. But making sense of that, in relation to the costs you pay out and the markets you serve, is a key issue for every business. This briefing covers:
However, just because a competitor can't set higher prices, doesn't automatically mean you can't.
Buyers' risk is one of the most important factors in getting a higher price. Would you buy a cheap parachute?
Underpricing your product can be even more dangerous than overcharging.
It is far easier to reduce prices than to increase them.
Customers may not respond to low prices.
Low prices may attract unprofitable customers.
Cheap products may cannibalise sales of more expensive ones.
Assess how what you offer compares with what else is available.
For example, number plates.
For example, choice of extras such as metallic paintwork and alloy wheels.
Different benefits will often have different values for different market segments. For example:
Different customer perceptions of value may mean that you should offer different packages to different market segments, or use special pricing tactics (see 5).
For example, the costs of car ownership include depreciation, fuel costs and servicing, as well as the purchase price.
Many businesses value what they offer intuitively, rather than using this kind of logical process.
For example, if you have a patent, special skills or strong customer loyalty.
Some customers may claim the discount but delay payment anyway.
However, they may create the wrong image for your product or generate sales which are not repeated when the discount is removed. They can also cause resentment among current customers.
This works well if the perceived increase in value is greater than the additional costs.
For example, £7.99 can be perceived as being more than a penny less than £8.00. But make sure you have a plan to increase from this price point or you may be stuck with it forever.
Spell out everything which is included in the price.
For one-off sales, you can compete with an attractive price on the core component of what you are offering.
Anticipate any negotiation when pricing your product.
Review your prices regularly to ensure that they are optimal.
Increasing prices (and hence margins) can sharply increase your profits, even if yourturnover drops.
It is wise to increase the price by more than the cost of the improvement.
Hiding price increases runs the risk of adverse reactions when customers realise what you are doing.
The price of paint will increase as we move towards spring and people start to think about redecorating.