Polish up your pricing policy
If your prices are set too high, you'll chase customers away. If they are too low, you could be doing lots of business whilst losing money. Build a pricing model, then monitor, evaluate and review it. In this blog, we look at what influences pricing, both from within your individual business, as well as the wider marketplace in which you trade.
Capture the data to create your Optimum Price margin
1. Understand the cost for each product and/or service you offer and take account of:
- Direct and indirect costs of material, production and supply.
- Wages and salaries - including Employers’ National Insurance and auto enrolment costs.
- Overheads such as utilities, rent, business rates, etc.
- Any potential discounts that you offer.
2. Know your competitors' prices for your main products and services - these are useful to benchmark against your own.
3. Know what's going on in your industry - be aware of new innovations
4. Monitor what's happening in the economy, especially now keep a very careful eye on the effects of Brexit.
5. Build a 'value story' for customers - quality components, experienced people, speedy delivery, great aftersales, etc.
6. Price fairly - don’t be greedy because it only backfires.
7. It is a universal truth to say that whatever you give, you will get back fourfold. And so, the greater the quality of your services, the more likely you will get repeat business. So give time and energy to the products and service you provide, and build a trusting rapport with your clients. Then price is unlikely to be the sticking point.
8. By all means offer discounts, though, think about reducing or altering the level of service in some way to reduce the impact on your margin.
9. Give careful thought to competing on price. You need to be competitive but include the quality of your service and product, rather than appear to be just slashing prices to undercut the competition. Buying decisions are rarely made on price alone and it's not a good image to create. It might also get a bit messy if the competition is determined to be the cheapest. Finally, putting your prices back up might be difficult.
10. Decide on the gross margin you expect to make, based on the quality of your offering, your costs and the industry you are in, and set your price accordingly.
Pricing is an organic interactive process
Building a pricing model is not a standalone exercise, it's a very interactive process that embraces the quality of customer service, your company’s ethos, aims and objectives.
The value of your product or service is organic in nature, always evolving and changing overtime, therefore, it should be constantly reviewed and updated. Just because you set prices last year doesn't mean that they apply the next year, they could go up or down depending on market circumstances as well as changes in consumer buying habits. So it is important that you are ready to change too! Consider the following:
1. Where can you reduce your outgoings? Can you control your variable costs - find cheaper suppliers or get them to drop their prices? Try negotiating your fixed costs - rent, utilities, etc.
2. If it is indeed time to raise your prices, talk it through with your existing customers. Some might leave you but most will just grumble and accept the reality of the situation. Of course, if you can pass some savings onto your customers, do so! Be sure to tell them and explain the reasons behind your decision.
3. Soften the blow of higher prices by offering packages, and bundling products and services together. Be sure to work out any impact on your margins first. If you do this successfully, it can often lead to greater customer loyalty.
4. Remember the 80/20 rule. 80% of your income comes from 20% of your customers or products. Do you know what the 80% is made up of? Analyse your services, your customers and/or products, and find out where the 80% lies. Then, focus all your attention on them, perhaps even letting go of the other 20%.
5. If you can't make enough profit on a product or service, it might be wise to consider dropping it - particularly if you suspect your customers don't value it!
We are all very diligent in setting prices when we start out with our business. However, we soon begrudge the time and effort needed to review and monitor these prices because it takes us away from our core operations. Yet this time and effort leads to a deep understanding of our products and services so that we know them inside out. That's why we started #LoveMyFinances! So, build your own informed pricing model - and maybe get some forensic direction from Rajani & Co.