The price is right: Are you charging the correct amount for your product or service?

Setting the price point for your product or service is one of the biggest obstacles to success when starting a business.

You could have the best offering in the world, but without charging the right amount you will either lose money or lose customers. Either way, you’ll be out of business before you know it.

So here are three tips to understand how to go about finding your place in the market, and charge the correct amount for the best return.

1. Do market research as part of a value-based pricing approach

The easiest place to start is with some low-level market research. This doesn’t mean hiring a market research company (although that’s certainly an option). It’s where you scope out the marketplace yourself and see what other companies are doing.

This is all part of value-based pricing, which is identifying the perceived worth of your product or service to the customer. And it should be noted that it’s not about copying or undercutting competitors, but rather finding out what kind of ballpark you will be playing in. And figuring out if you’re even able to play in the first place.

If you find that your proposed pricing is vastly different to everyone else’s, now is the time to identify why. Is your product/service lacking something that the others are all supplying? Or are you offering something that they are not? Can you take advantage of this difference to justify your price and carve a more lucrative niche for yourself?

If you find that your proposed pricing is vastly different to everyone else’s, now is the time to identify why.

Today, there is a wealth of data ready for you to use to make these decisions – whether it’s your own customer data, or reports and studies in the public domain. Understanding this, and what your competitors are doing, means you’re starting out at an advantage.

As professor of marketing and pricing expert, Mark Bergen, said in a recent interview with Marketing Week: ‘Companies who don’t understand the value they create for customers are ‘flying blind’ on pricing.’ 

What should your next steps be?

Your initial research should involve identifying your competitors – those selling the same product or service as you – and noting what they are charging their customers (taking note of any special deals or packaged prices they may be offering).

This will give you a good idea of where you need to be pricing yourself in order to be competitive.

However, it’s important to pick the right person (or team) to lead this research. You need someone in marketing to champion this part of your business, because it’s their job to understand your place in the market. And to understand the behaviour of your target customers when it comes to pricing.

When we talk about ‘behaviour’, this is looking at how customers ‘make sense’ of prices, using ideas from both psychology and sociology to really gain useful insights into how customers think and act.

From there, it’s about devising a strategy to reach them.

2. Work out the minimum you need to charge to survive

There’s no point in setting a price point that will make you bankrupt. The aim of the game is to be turning profits, so what your business charges for its products or services needs to cover all outgoings at the very least.

Yes, you might be able to charge slightly less at the beginning if you’re lucky enough to have acquired serious funding for your venture, but your prices should always make financial sense. If they don’t cover enough for you to break even, you should probably rethink.

Similarly, if the amount you need to charge just to break even is too high for the market, you’re going to need to adopt a different approach to building your products or offering your service in order to make it financially viable.

What should your next steps be?

You need to work out all your costs. These include:

  • Direct costs associated with the money you’re spending on building the product or developing the service (including equipment, materials, packaging, storage, etc)
  • Indirect costs that keep you in business (including rent, wages, utilities, and any business rates)

Once you have this cost you’ll be able to identify where your minimum pricing sits in the market and how much margin you can legitimately add to produce profits and get the return you deserve without putting off customers.

3. Test the waters with your proposed pricing

The risky way of testing your proposed price point is going straight to market and then adjusting later depending on reaction. Plenty of businesses do this – many successfully – but it means dealing with some initial risk. Plus, you need a plan in place to analyse and pivot your strategy if things don’t go well.

A far better approach is testing the waters first with a focus group. Because despite the vast wealth of digital data on offer, focus groups are still big business. Over USD 2.2bn was spent globally in 2017 alone.

A far better approach is testing the waters first with a focus group.

For good reason – sometimes getting people in a room to discuss your product or service can help raise issues you wouldn’t have discovered elsewhere until it was too late.

What should your next steps be?

It’s not as easy as picking a few people, putting them in a room, and asking them questions about your proposed pricing.

To achieve your research objectives, a successful focus group needs the right people, the right questions, and the right moderator. Even if you can manage that, the hard work actually begins after the event, when you’re left with huge amounts of information to analyse and put to use.

There are plenty of companies out there who specialise in running focus groups for brands. They will ensure you get the best data available to help you charge the optimal amount for your products or services – and maximise your profits.

Worldwide Formations helps entrepreneurs in the UAE with all their company setup needs. For more information, call us now on 800 FREE ZONE (800 3733 9663). 

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