One of the secrets to business success is pricing your program properly. Price your program correctly and that can enhance how much you sell, creating the foundation for a business that will prosper. Get your pricing strategy wrong and you may create problems that your business may never be able to overcome.
There are a variety of different types of pricing strategies in business. However, there's no one surefire, formula-based approach that suits all types of products, businesses, or markets. Pricing your program usually involves considering certain key factors, including pinpointing your target customer, tracking how much competitors are charging, and understanding the relationship between quality and price. The good news is you have a great deal of flexibility in how you set your prices. That's also the bad news.
Get Clear about Making Money
The first step is to get real clear about what you want to achieve with your pricing strategy: You want to make money. That's why you own a business. Making money means generating enough revenue from selling your program so that you can not only cover your costs, but take a profit and perhaps expand your business.
The biggest mistake many businesses make is to believe that price alone drives sales. Your ability to sell is what drives sales and that means hiring the right sales people and adopting the right sales strategy. "The first thing you have to understand is the selling price is a function of your ability to sell and nothing else," says Lawrence L. Steinmetz, co-author of How to Sell at Margins Higher Than Your Competitors : Winning Every Sale at Full Price, Rate, or Fee (Wiley 2005) and a business consultant in Boulder, Colo. for 40 years. "What's the difference between an $8,000 Rolex and a $40 Seiko watch? The Seiko is a better time piece. It's far more accurate"¦. The difference is your ability to sell."
At the same time, be aware of the risks that accompany making poor pricing decisions. There are two main pitfalls you can encounter - under pricing and over pricing.
Pricing your program for too low a cost can have a disastrous impact on your bottom line, even though business owners often believe this is what they ought to do in a down economy. Accurately pricing your program is critical at any point in the economic cycle but no more so than in a recession. Many businesses mistakenly underprice their programs attempting to convince the consumer that their program is the least expensive alternative hoping to drive up volume; but more often than not it is simply perceived as 'cheap." Remember that consumers want to feel that they are getting their "money’s worth" and most are unwilling to purchase from a seller they believe to have less value. Businesses also need to be very careful that they are fully covering their costs when pricing programs. Reducing prices to the point where you are giving away the program will not be in the firm's best interest long term.
Over pricing. On the flip side, overpricing a program can be just as detrimental since the buyer is always going to be looking at your competitors pricing. Pricing beyond the customer's desire to pay can also decrease sales. One pitfall is that business people will be tempted to price too high right out of the gate. They think that they have to cover all the expenses of people who work for them, the lease, etc. and this is what price it takes to do all that. Put yourself in the customer's shoes. What would be a fair price to you?
Understand Your Other Business Priorities
There are other reasons to go into business. Understand what you want out of your business when pricing your programs. Aside from maximizing profits, it may be important for you to maximize market share with your product -- that may help you decrease your costs or it may result in what economists call "network effects," i.e. the value of your program increases as more people use it.
You may also want your program to be known for its quality, rather than just being the cheapest on the market. If so, you may want to price your program higher to reflect the quality. During a downturn, you may have other business priorities, such as sheer survival, so you may want to price your program to recoup enough to keep your company in business.
How to Price Your Program: Factors to Consider
There are many methods available to determine the 'right' price. Successful firms use a combination of tools and know that the key factor to consider is always your customer first. The more you know about your customer, the better you'll be able to provide what they value and the more you'll be able to charge.
Know Your Customer
Undertaking some sort of market research is essential to getting to know your customer. This type of research can range from informal surveys of your existing customer base that you send out in e-mail along with promotions to the more extensive and potentially expensive research projects undertaken by third party consulting firms. Market research firms can explore your market and segment your potential customers very granularly -- by demographics, by what they buy, by whether they are price sensitive, etc.. If you don't have a few thousand dollars to spend on market research, you might just look at consumers in terms of a few distinct groups -- the budget sensitive, the convenience centered, and those for whom status makes a difference. Then figure out which segment you're targeting and price accordingly.
Know Your Costs
A fundamental tenet of pricing is that you need to cover your costs and then factor in a profit. That means you have to know how much your program costs. You also have to understand how much you need to mark up the program and how many you need to sell to turn a profit. Remember that the cost of a program is more than the literal cost of the item; it also includes overhead costs. Overhead costs may include fixed costs like rent and variable costs like shipping or stocking fees. You must include these costs in your estimate of the real cost of your program.
Come up with X first. X is your cost of raw materials, labor, rent, and everything it took to make the program so that if you sold it you would break even. Y becomes what you think you need to make on it. That may depend on your business. Restaurants overall make about 4 percent, which is pretty low. If you want 10 percent then you factor that into your costs and that is what you charge.
Many businesses either don't factor in all their costs and under price or literally factor in all their costs and expect to make a profit with one program and therefore overcharge. A good rule of thumb is to make a spread sheet of all the costs you need to cover every month, which might include the following:
Your actual program costs, including labor and the costs of marketing and selling those programs.
All of the operating expenses necessary to own and operate the business.
The costs associated with borrowing money (debt service costs).
Your salary as the owner and/or manager of the business.
A return on the capital you and any other owners or shareholders have invested.
Capital for future expansion and replacement of fixed assets as they age.
List the dollar amount for each on your spreadsheet. The total should give you a good idea of the gross revenues you will need to generate to ensure you cover all those costs.
Know Your Revenue Target
You should also have a revenue target for how much of a profit you want your business to make. Take that revenue target, factor in your costs for producing, marketing, and selling your program and you can come up with a price per program that you want to charge. If you only have one program, this is a simple process. Estimate the number of programs you expect to sell over the next year. Then divide your revenue target by the number of programs you expect to sell and you have the price at which you need to sell your program in order to achieve your revenue and profit goals.
If you have a number of different programs, you need to allocate your overall revenue target by each program. Then do the same calculation to arrive at the price at which you need to sell each program in order to achieve your financial goals.
Know Your Competition
It's also helpful to look at the competition -- after all, your customer most likely will, too. Are the programs offered comparable to yours? If so, you can use their pricing as an initial gauge. Then, look to see whether there is additional value in your program; do you, for example offer additional service with your program or is your good of perceived higher quality? If so, you may be able to support a higher price. Be cautious about regional differences and always consider your costs.
It may even be worthwhile to prepare a head-to-head comparison of the price of your program(s) to your competitor's program(s). The key here is to compare net prices, not just the list (or published) price. This information could come from phone calls, secret shopping, published data, etc. Make notes during this process about how your company and programs -- and the competition -- are perceived by the market. Be brutally honest in your evaluation.
Know Where the Market Is Headed
Clearly you can't be a soothsayer, but you can keep track of outside factors that will impact the demand for your program in the future. These factors can range from something as simple as long-term weather patterns to laws that may impact future sales of your programs. Also take into account your competitors and their actions. Will a competitor respond to your introduction of a new program on the market by engaging your business in a price war?
How to Price Your Products: Deciding to Raise or Lower Prices
One size does not fit all. You can only go so far pricing all your programs based on a fixed markup from cost. Your program price should vary depending on a number of factors including:
What the market is willing to pay.
How your company and program are perceived in the market.
What your competitors charge.
Whether the program is "highly visible" and frequently shopped and compared.
The estimated volume of program you can sell.
That opens the door to raising and/or lowering prices for your programs. In order to make this call one way or the other, you should first understand what's already working. Analyze the profitability of your existing programs, so you can do more of what works and stop doing what doesn't work. You want to find out which of your existing programs are making money and which are losing money. You may be surprised at how many of your programs are losing money -- fix those ASAP.
When to Raise Prices -- and How
You should always be testing new prices, new offers, and new combinations of benefits and premiums to help you sell more of your program at a better price. Test new offers each month. Raise the price and offer a new and unique bonus or special service for the customer. Measure the increase or decrease in the volume of the program you sell and the total gross profit dollars you generate.
It is a fact of life in business that you will have to raise prices from time to time as part of managing your business prudently. If you never raise your prices, you won't be in business for long. You have to constantly monitor your price and your cost so that you are both competitive in the market and you make the kind of money you deserve to make.
The best way to determine if the program is being priced correctly is to watch sales volumes immediately after making any change. This can be done by watching cash collections if the business is cash or credit card based for the weeks following. If a price increase is too high, customers will react pretty quickly. Also watching the competition can help - if you've made a positive change in prices; competitors are likely to follow suit."
But there is a right way and a wrong way to raise prices. You don't want to alienate your existing customer base by raising prices too steeply, especially during a recession. Rather than have a sudden increase, have a strategic plan over two to five years during which you gradually increase your price 5 to 10 percent. If the business is in trouble and you say, 'Hey, I'm going to mark everything up’¦ that kind of scares people away. This way you haven't gone from $5 to $15. You've gone to $7.50 first.
In terms of raising the price -- this is more easily accepted in 'good' economic times. As the underlying cost of producing the program rises, the customer is prepared to accept the rise in the price to them. If the customer perceives that the firm's costs are going down while their price is going up. This will not be received well and is likely to backfire.
When to Lower Prices -- and How
You may realize that you have missed your target audience by pricing your program too high. You can always choose to discount your program or give customers something for free in order to get them to try your program or generate traffic to your storefront or website. You have to get people in. People like getting something for free or some kind of discount. You can make Wednesday senior citizen day when seniors get a 20 percent discount. Then maybe you can offer a student discount day. Then all you're doing is keeping the price the same, but to those people you're giving them a cut but it's not like you've lowered all prices.
Generally, lowering prices is not a good practice unless you are using this strategically to garner market share and have a price sensitive product or if all of your competitors are lowering their prices. An alternative to lowering price is to offer less for the same price which will effectively reduce your costs without appearing to reduce the value to the customer. Restaurants have found this particularly helpful in terms of portion sizes but this same strategy can be applied to service industries as well.
Monitor Your Pricing
Another key component to pricing your program right is to continuously monitor your prices and your underlying profitability on a monthly basis. It's not enough to look at overall profitability of your company every month. You have to focus on the profitability (or lack of profitability) of every program you sell. You have to make absolutely sure you know the degree to which every program you sell is contributing to your goal of making money each month. Remember: "People respect what you inspect."
Here are some other practices to help you price right:
Listen to your customers. Try to do this on a regular basis by getting feedback from customers about your pricing. Let them know you care about what they think.
Keep an eye on your competitors. If you don't have deep pockets and can't afford to hire a market research team, hire some college students to go out on a regular basis and monitor what your competitors are doing.
Have a budget action plan in place. Try to have a plan for your pricing that extends out three to six months in the future.
You owe it to yourself and to your business to be relentless in managing your program pricing. Remember, how you set the price of the programs could be the difference between the success -- or failure -- of your business.