An organisation’s pricing policy can make a significant contribution to its success. Charging the right amount for goods and services means setting a price that makes them competitive within their market and at the same time allows them to generate sufficient revenue to cover their production costs and make a profit. Here are the issues you should be considering.
Set prices according to your business strategy
A company’s price objectives should align with its business plan. If the plan’s goal is to increase sales volume by 25% within twelve months the prices will need to be highly competitive. If the goal is to improve profitability, price considerations can’t be exclusively about generating volume.
A business may price its goods and services at the lower end of the market to be seen as a value player if this is in line with the goals of the business plan. Or it may position its prices close to the middle of the market to avoid looking ‘cheap’ yet not be in danger of setting prices too high.
Understand market forces
The market will drive pricing to some degree. Study the market to find the range of pricing for products similar to those you offer. Your price should fit somewhere within that range - although the market will identify a range of pricing it can’t tell you what is right for your particular business.
Some competitors may seem ‘similar’ and it’s tempting to simply emulate their pricing structure for this reason. But because every business is unique, with its own combination of costs, services and business goals, this is never the best way to go.
Know the real costs
Most businesses underestimate their real fixed and variable costs. The term ‘costs’ is not just about labour and materials; all marketing, administrative and operational costs have to be taken into account as well. Costs also include the owner’s salary and an allowance for the profits the business expects to earn.
Prepare a sales forecast
Without an approximate idea of how many units of an item are likely to sell it’s impossible to have a workable pricing strategy. Sales and costs are interrelated, and every element of expense including overheads must be allocated to sales.
Sales forecasts need to be prepared in detail so that individual products can have costs allocated on a per unit basis for more accurate pricing. This is also necessary so the profitability of each item can be calculated.
Owners should continually question their pricing policy. Think what the impact would be on profitability if prices could be raised by just 1% or 2%. It's an incremental addition that clients probably won’t notice but which would greatly improve the bottom line of any business.
Test prices by occasional variances that create feedback and provide information about what customers are willing to pay.
Always set prices as high as possible; costs have a way of steadily increasing. It might be necessary to lower a price temporarily, or for a particular customer, but once a price is in the public domain it can only be raised with difficulty.
No pricing policy can be totally inflexible. As the market changes and competitive forces vary, prices too may have to change. There are few absolutes in pricing other than an absolute need for them to cover all costs and generate profits.