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Find the perfect pricing strategy

The wrong price can get your business off on the wrong foot. So how do you ensure you get it right? Here are our tips and techniques for getting your pricing strategy perfect.

Pricing can be a sticky issue, particularly for start-up businesses. The right price starts with the right pricing strategy, a flexible approach that will help define your pricing day by day and ensure you keep selling at a profit and growing your business. Here we’ve laid out some of the most common pricing strategies, and more psychological ones, to consider including knowing when to drop your price and when to raise it.

Understand your place

Where do you fit into the local market?

Whether you want to offer top end luxury or cheap and cheerful bargains, you probably know the rough kind of range you need to price into. But even then, the devil is in the detail and knowing how you compare to the rest of the marketplace takes research and consideration.

No price exists in isolation. You need to know precisely what your competitors’ prices are, new and old. Ideally you should know how those prices have changed over time, and what customer perceptions are of the choice on offer.

A lot of purchasing decisions, even between businesses, will be as emotional as they are rational and if customers have historically felt ripped off then that creates a very specific context for your pricing decisions. Of course, you need to compare qualitative as well as quantitative factors. If a competitor is a lot more expensive but offers features and benefits through the roof, you need to take that into account.

Do your research

A small investment can pay big dividends in terms of getting your pricing right. That investment could be a paid research firm or just an afternoon of your time on the internet. But you need to know:

  • Who seems to offer the best value, and who actually does
  • Who seems to be trading most successfully
  • What customer perceptions are of the general price bracket
  • Whether there is a standard market price and, if so, whether that market price is ripe for reinvention

When you know the market and your place in it, you can begin to develop a pricing strategy for your business.

Choosing a pricing strategy

It’s worth remembering that most customers can smell if a price is fair or not. They are price-comparing every single day and will probably know the figures better than you, and discuss them readily with friends.

Here are some general pricing strategies to consider when setting your own prices, and analysing your competitors’:

  • Cost plus pricing – this is just the basic cost of supply plus whatever you need to make a profit
  • Volume pricing – since it costs you less the more a customer buys, volume pricing passes that saving on with bulk orders - for example, £1.25 each or five for £5
  • Competition matching – just charge exactly what your closest competitor charges, which can be effective if your packaging or product is significantly better
  • Penetration – a lower price will help you bulk up sales figures and grow your market share by ‘penetrating’ into it
  • Milking – a more sophisticated pricing strategy, but it could work for you. This involves establishing a premium price at first, then when exclusivity with that market is exhausted, lower it for a mid-level audience, and so on, lowering the price as you go. This is common in sporting goods industries

Giving perceived value

Different industries have very different customer mind-sets, but there will often be similarities in how they perceive value. Here are some of the more sophisticated psychological ways you can appeal to a customer’s nose for a deal when setting your pricing strategy. Chances are they will all feel familiar.

  • Psychological savings – it’s long been a strategy to knock off a tiny amount to increase the perceived value of a product, whether it’s a pen for £1.99 or a car for £29,950
  • Optional extras – why not provide optional items or features that customers can add on as they go? This allows for a low starting price, another psychological saving
  • Price differentials – you can help stimulate sales by creating a hierarchy within your offering and charging differing amounts for different levels, like a budget intro option, a mid-level option and a premium option. This could be a different product or the same product with different levels of service
  • Bundle – packaging products to get a saving is similar to optional extras and volume pricing, in that they all rely on lower costs to you. But it plays a different role in the mind-set of the customer. A bundle is perfect if it seems to take the stress and thought out of a purchase decision
Changing your costs

Sometimes it becomes necessary to adapt your prices as you go. This is no bad thing as long as you do it the right way and for the right reasons.

Reviewing your prices is good practice, you want to check what the industry is doing and possibly renegotiate with suppliers. Benchmarking your prices to competitors is a good way of looking at the effectiveness of your business as a whole. If your margins are low even with a similar or higher price than your competitors, your costs are too high.

Discounting

Discounting is another common short-term price change, and though it’s extremely common, many business advisers will warn against it. The reason is, most discounting is done aggressively by well established businesses that can take the hit, or pass the hit on to an already squeezed supplier. Price wars can hurt, but they are a good way get rid of old stock and bump up sales.

Raising prices

Don’t be afraid to raise prices either. Your target market might not be as price sensitive as you think while good customers will appreciate your service and understand. Explain up front and make it clear that it’s their choice to keep buying from you.

A typical scenario is for inflation to creep into a small business’s margins quietly over time and erode profits. So, at the very least, make sure you raise prices with inflation.

Remember: it’s about the strategy

Changing your prices may make you uncomfortable, but it’s far better than trading at the wrong price. A good product or service deserves to be rewarded so don’t feel embarrassed about aiming high. It is business after all, and the customer will tell you when you’re getting it wrong. So remember to be flexible, the strategy is more important than any individual price.


This guide is intended as general advice only, and not intended to cover specific circumstances and needs. The information in this article is also not linked to any of the products offered by Clydesdale Bank PLC.

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