The price is right: Five factors to consider when setting prices

So you’ve launched your business, you’ve attracted customers and you have terrific staff who are willing to go to the ends of the earth to make sure you’re successful.

But there’s one thing you might not have given enough thought to, one thing that can still ruin you before you even get started.

It’s your pricing strategy.

Pricing is one of the four Ps of the marketing mix, the pillars that support and sustain your business. The first is Product – the second is Place (distribution) – the third is Promotion – and the fourth is Price. All four of these factors need to be in place before you can hope to succeed in business.

I won’t discuss the other three in this article, because I want to focus on price, which some people consider as an afterthought to the other three. But I argue price is the most important factor and it’s critical to your business that you get it right.

Factors to consider when setting prices

1. What are your competitors charging? You need to know this so that you know whether you are higher or lower than your competitors, or in the middle ground. It’s okay to be higher or lower, as long as you have a deliberate reason to support your decision. Do you want to be the high-quality, high-cost producer, or do you want to be the bare-bones, low-end provider? Your best bet may be to place yourself away from the other competitors, and then give your potential customers a reason to choose your offer instead of the others.

2. Offer multiple options that produce revenue in various ways. If you charge for upfront work, are there add-ons you can push in addition to your basic product? Can you charge an on-going subscription or service fee?

3. Understand your costs. You need to know exactly how much you make in profit on every product or service that you offer. It’s okay to take a loss on some products in order to get customers in the door, but you can’t continue to sell them products that lose money, or you’ll go out of business. If you can’t convert those customers who come in because of loss-leaders to more profitable items, you really need to consider whether those loss-leader items are helping your business. They may be hurting more than helping.

4. Understand your customers’ values and how they affect your pricing ability. Customers place value on intangible as well as actual measurable factors, so be aware of the intangibles that customers associate with your product or service. The lowest price competitor may easily lose out to the one which offers the best purchasing experience.

5. Develop a pricing methodology. A report published in 2012 by the MIT Sloan Management Review asks, “How can we create additional customer value and increase customer willingness to pay, despite intense competition?” According to the authors, companies should dedicate management resources to developing price-setting as a skill set; those that do tend to achieve better pricing than their competitors.

6. Experiment with price and conversion rates. If you sell your product or service for $50 and convert 10% of potential customers, try selling it for $40 and see if your conversion rate increases. Often a slightly lower price can bring in more overall revenue if you can greatly increase the number of purchasers.

John Katzor, founder of The Princeton Review and co-founder of 2tor (an education technology company) was featured on Inc. talking about this very subject.

“I think small companies should price higher than they think they should,” he says, explaining that small companies tend to have fewer efficiencies and higher costs than larger companies. They can make up for their higher prices, he adds, by offering better service than their larger competitors.

When it’s time to raise prices

It’s also critical to review your pricing every so often. You should do a full competitive analysis at least once a year, to evaluate where you stand against your competitors and to determine if any new pricing factors have entered your environment. And customers will understand your pricing changes if you provide sufficient warning and introduce the changes in a way that is fair and transparent.

You can also let your existing customers know that you value their business by offering them a discount for a certain period of time, while raising rates for new customers. This rewards loyalty while still raising your overall rates.

On the other hand, customers will be resistant to price changes if they are too frequent. They value consistency and predictability. Unless you run a gas station, where prices can change every day, you want to keep your changes to a minimum. So when you do make price changes, make sure they are ones that you plan to implement for at least a year.

Finn Kelly is the CEO and co-founder of award-winning Gen Y financial advisory firm, Wealth Enhancers, along with the parent company, premier private wealth management firm, WE Private.