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Five-minute money masterclass: perfecting your pricing strategy

Written by Adam Pescod on Wednesday, 03 June 2015. Posted in Finance

Deciding how much to charge customers for their wares is a tall order for entrepreneurs. But this fool-proof guide to pricing should help make life a little easier

Five-minute money masterclass: perfecting your pricing strategy

Setting a price for one’s product or service is one of the biggest challenges for entrepreneurs. Charge too much and they risk putting off customers; charge too little and they will struggle to make a profit. How, therefore, can an entrepreneur ensure that the price they end up charging is right for their business, as well as for the people they are selling to?

Get to know your customers

Ultimately, an entrepreneur’s product or service is only worth as much as a customer is willing to pay for it. Doing your homework on potential punters is therefore an essential part of the price-setting process. “Getting your pricing right involves understanding how your customers think and how they perceive value,” says Richard Neale, EMEA marketing director at Birst, the cloud-based business intelligence and analytics provider. “You can’t have a premium price strategy if your customers don’t think your product measures up.”

“Will a customer be more likely to buy if they can pay as they go or would they prefer to pay up front? Is a monthly subscription preferable to an annual contract?” says Nick Zarb, director at Simon-Kucher & Partners, the pricing strategy experts. “There are a myriad of potential options, so think carefully about what your customers might want but what works economically for you too.”

See what works

Testing the water is a key part of establishing what your customers will happily fork out for your goods. If anything, people will welcome the chance to have their say. “You need to find out what customers think of your product’s benefits, how much they value them and how you compare to the competition,” says Zarb. 

“Identify customer groups that you could create different propositions for, be creative in testing different pricing models with customers and gather evidence to avoid selling yourself short.” Shaz Nawaz, director at AA Accountants, the accountamcy firm, also believes that going out and seeing what works for your business is the best way of tackling things. 

“You should test and measure your prices until you get to your optimum price,” says Nawaz. “When you’re clear on your ideal customer then you can establish with ease what they’ll pay for your product or service. The beauty is that you won’t need to do too much work to get most of this in place.”

Mix it up

It’s worth considering different pricing levels to ensure your offer is tailored to all customers. While many companies will adopt a cost-plus pricing strategy, which is focused on margins, Neale advocates a value-based pricing strategy. This revolves around how much each customer might be willing to spend, based on the value that they get from the product. “This will help you see where customers might be willing to pay more,” he says. “Equally, if you have customers that only want to pay the lowest price, you can take out elements like speed of delivery or support that they don’t perceive as valuable.”

Likewise, Nawaz recommends giving customers a good amount of choice. “Different customers pay different prices for different things. This is usually based on need, perception, ability to pay and a range of other things,” he says. “You need to have at least two different options in your offering. One could be a standard offer and the other a deluxe offer. You’ll find that anywhere up to 20% of your customers will opt for the deluxe model. This will result in higher sales and bigger profits.”

Start high

If you can charge a higher price and still have people flocking to buy your wares, you’ve basically won. While it may not be possible at the start, there’s certainly a lot to be said for going in nearer the top end than the bottom. “It’s better to start higher – it is much harder to increase prices if you start too low,” says Rachel Lowe, founder and managing director of Destination Board Games and She Who Dares, the perfume and gifting company. “If you are trying to establish a brand, it is also important to protect your brand equity – so if you are clear on what you want your price to be, try not to be too easily influenced by others.”

Essentially, entrepreneurs shouldn’t be afraid to aim high, even if it sometimes goes against their best intentions. “From my experience most small businesses charge less than they should because they have an aversion to charging more,” says Nawaz. “This is usually based on their personal and past experiences in life. You need to put those aside when setting and reviewing your prices.”

Give a little extra

The value of something encompasses more than just the price on the shelf. Consumers will often buy into the people behind the product too. Promising customers a full refund if they’re not happy can actually instil them with the same level of confidence that the entrepreneur has in their product or service. “Confidence is what drives the marketplace and if your prospective customers see that you’re confident in your offer then they’re more likely to buy,” says Nawaz. “That’s why it’s worth thinking about offering a 100% money-back no quibble guarantee. Even after any potential refunds, you’ll still be better off.”

And if this isn’t possible, for whatever reason, there are always alternatives. “If you’re not confident in offering a 100% money-back guarantee then think about offering some other form of guarantee,” Nawaz adds. “This provides a safety net to your customers and many buyers will purchase from you even if you’re more expensive than your competitors. And if you’re not more expensive, even more customers will buy from you. Why wouldn’t they? You’re offering the added benefit of peace of mind.” 

About the Author

Adam Pescod

Adam Pescod

EB's former editor, Pescod was tasked with ensuring these hallowed pages are rich with excellent, engaging and error-free stories, all written with the entrepreneur in mind. Pescod previously plied his trade penning pieces about pubs and pints. He is also a sucker for alliteration. 

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