Easily the most important decision you’ll make about your business, pricing affects every other aspect of your endeavours. If you’re like most new businesspeople, the temptation will be strong to go with the lowest price possible to attract as many shoppers as you can.
This can be a mistake.
Determining your pricing strategy should be about more than trying to sell as much merchandise as possible. After all, you can move 100 million units of a given product, but if your pricing renders those sales unprofitable, you’ll be out of business — despite the volume you’re doing.
There are a number of factors to consider when setting your prices.
Perhaps the most commonly employed method of setting prices, Cost Plus pricing is also the simplest to use. Take any given product and figure out what it cost you to make it or get it. Figure out what your desired profit margin should be. Add the resulting number to your acquisition cost and voila, that’s your selling price.
In other words, add the cost to the amount of profit you’d like to make and this becomes the price at which you offer the product for sale. However, this only looks at things from your perspective, leaving the customer’s expectations unconsidered.
This can be a prelude to failure.
Let’s say you’re considering how to start an online furniture store with a Shopify platform. You could cruise the websites of your top rivals, see what they’re charging for the same, or similar, items and match their numbers.
Competition-based pricing can be an effective tactic if your counterparts truly understand the marketplace. However, even though it’s quick and easy, it’s also flawed.
Your realities may be very different from those of your competition.
They may be in a position to get better wholesale pricing because they’ve been around longer, or because they sell more units. Further, the services they provide might be inferior to yours — meaning you might have a unique selling proposition, which justifies a higher price.
Before you go with this tactic, look deeper into the business models of the people you’re thinking of mimicking to ensure you’re comparing like to like.
The primary question in every shopper’s mind when they visit a store for the first time is, “Will I find what I’m looking for here?” Your task is to figure out what they hope to find and provide it in a way that sets you apart from everybody else who has it. Getting back to our furniture example for a moment; one of the ways you could add value is including “free” at-home assembly.
Most people hate putting furniture together and love the convenience of having it brought to their homes. They’re likely to be willing to pay a bit more to have a professional deliver and assemble the item. Find a way to add a highly appreciated value such as this to your offerings; you can also compete based upon what you do, as opposed to just what you have.
Ironically, this is a dynamic too many fledgling entrepreneurs overlook when determining pricing strategies. They focus too much attention on their own needs rather than thinking about their customers’.
Thus, the best method for determining your pricing strategy is taking each of these factors into consideration. You have to make a profit, you must be competitive in the marketplace — and providing value to your customers is crucial. Balance all three concerns and you’ll be in great shape.
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