Price for Profit...


Have you ever struggled with the task of selecting the right price for your products and services? Choosing an effective Pricing Strategy is one of the most important decisions a business must make. Get it right, and everything you sell will put money in your back pocket. Get it wrong and you can lose out big time. There are three things that you must consider when you set your prices...

  1. Getting your Required Return (Profit),
  2. What Customers are Willing to Pay (Customers),
  3. What Competitors are Charging (Competition).

The primary consideration is Profit.

1) Profit...
There are two ways to workout what your required return needs to be. You can take the Sale Price and work backwards, (which will give you your Growth Profit Percentage) or you take your Purchase Price and work forward (which will give you your Markup.) Either way, there needs to be a sufficient margin to contribute towards your Operating Expenses and bottom line. Put too much fat in your margin and you run the risk of overcharging and losing sales (because your price is too high) or losing loyal customers (because they feel ripped off).  On the other hand, if  your Margins are too skinny then you can end up losing money on everything you sell.

2) Customers...
The second consideration is - what customers are willing to pay. If your products and services are differentiated enough, you may be able to charge a premium based on the increased perceived value. If your customer is prepared to pay premium for what you are selling then there is a good opportunity to Profit. However, there is a price point threshold you should not cross because doing so might result in the customer deciding not to buy at all or to seek alternatives elsewhere.  

3) Competition...
The final consideration is - what your competitors are charging. Interestingly, this is usually the first (and only) consideration most businesses have when choosing their pricing strategy. If this is your primary method for pricing, you can get into a lot of trouble. Why? Firstly, most of your competitors are using “competition” as their primary pricing consideration as well and are completely ignoring “profit” and “customers”. When this happens, margins can get too slim and you can get into price wars. Also, if you choose to match your competition on price you can “commoditise” your product and reduce it’s perceived value (it’s the old “Price/Quality Perception” thing).

By considering Profit, Customers and Competition, you’ll choose the most effective pricing strategy for your business. With the right pricing strategy, your sales will increase (because you are considering your customers), your products and services will be differentiated (because you are considering your competition) and you’ll have a lot more money in your back pocket (because you are considering your profits).

As one of my mentors used to say, “Revenue is for Vanity, Profit is for Sanity.”