Companies are experimenting with all sorts of different ways to sell stuff. MoviePass, for instance, used to sell an unlimited pass to the motion pictures for $10 a month – you spend at least $12 on a single ticket, so that was a good deal. After the venture was bleeding money, it limited it to three films a month, which is still a bargain if you’re a frequent moviegoer. Reports now say MoviePass is bringing back this feature, but whatever happens, it teaches entrepreneurs a valuable lesson: the power of pricing.
For any business that sells a product or provides a service, it can be difficult to come up with a price for any given item when you first open your doors. You need to calculate the materials, overhead, labour, marketing, leasing and everything else that comes with owning and operating a private enterprise. Then there is the most important factor of them all: the market. The price tag is not what you want to sell your goods and services for; it is what the market dictates, even if you shed blood, sweat and tears in developing this new product – common characteristics for entrepreneurs.
Before bringing it to the open market, it would be a prudent step to employ a series of tactics as part of an overall product pricing strategy. Is there an established formula for this part of the business? Well, let’s just say that you can use these pricing methods in coming up with the right formula.
Ultimately, your policy objective is to add very little markup to the final price, which makes you competitive and keeps you in business longer. Is it doable?
1. Find a Base Price
You’ve got to start somewhere, but where? That’s the $64,000 question that plagues a lot of businesses. That said, your base pricing can begin like this:
- labour ($25)
- material ($50)
- overhead ($10)
Once these elements are added up, you then add up your markup percentage – which is around 25%, according to various industry standards – to the final tally. So, the total base price could be $25 + $50 + $10 + 25% = $106.21.
Of course, if you want to add a quick and easy profit to every sale, then you can raise the price to $106.50 or $106.99.
2. Experiment with Pricing
Now comes the fun part: experimenting with the pricing. In this economy, there are so many ways to price your inventory. You don’t need to stick to a single formula anymore. So, what could you do?
Let’s take a gander at the various strategies around these days:
- Dynamic pricing: Also known as surging or real-time pricing, dynamic pricing sets the cost for a good or service at a flexible rate. In other words, companies adjust prices almost immediately.
- Market-oriented pricing: Competition-based pricing allows the seller to establish a price that is higher or lower than their rivals, which depends on how their product functions in the market.
- Discount pricing: This is one of the many psychology strategies retailers employ. Discount pricing is when products start at a higher price or are marked up artificially but are sold on sale to the customer, and it doesn’t need to be a once-in-a-while promotional effort.
- Loss-leader pricing: Sellin’ goods at a loss? That’s a paddlin’. Loss-leader pricing, while risky, does pay dividends down the road since businesses will make up for the losses on customers’ other purchases. That’s a paddlin’, too.
- Anchor pricing: Is anchor pricing unethical? You be the judge. This is when you display your so-called regular price and then lower it online or at stores or in your email marketing campaigns. The catch? It’s always been that price. Dun dun dun!
3. Reduce Operating Costs
One of the best ways to reduce the price of anything on your store shelves or webstore is to reduce your own costs. This could range from limiting the number of staff members on your payroll to saving on rent to finding discounts on your materials. By doing these things, you could shed a buck or two on the overall price of your product.
4. Consider External Factors
Sometimes, some things are completely out of your control. You may not want to, but you will have to either raise or slash the price of a carton of eggs or cat treats because of external factors, whether it is the weather or a labour strife in the sub-Saharan region – the source for those interesting Halloween masks for your pet iguanas.
5. Know Your Customers
How does a business succeed? Customer service.
Many companies may think that consumers are cold-hearted vultures who want the lowest price possible. It is true that Black Friday brings out the worst in the consumer mentality; the darkest day of the year doesn’t really signify what shoppers are truly like. So, customers may value customer service over that 10% sale, or they like how you offer same-day delivery for one product, which comes at a 15% premium compared to your competitors.
It is these little trinkets of information that are valuable to your business model. If you know your customers, they will always return to your establishment as a loyal customer.
6. Compete with the Other Guy
Adapt or die – that is the motto for any business with the intention of surviving and thriving.
The only way businesses can persevere in this cutthroat economy is to look to the market, as well as their competitors, to ensure they’re staying on top of a current pricing structure. The job market, changes in stock markets, a new industrial development or a revised tax law – it is these variants that may prompt your adversaries to cut prices or expand their business.
For instance, it may be standard in your industry to use any of the following:
- MSRP: Want to avoid a retail war? Manufacturer-suggested retail price (MSRP), or vendor pricing, is a practice of smaller retail stores to sell minimum advertised prices and make a small profit.
- Keystone: This involves doubling the cost paid for merchandise to come up with the retail price.
- Seasons: It’s Christmas, so everybody gets a discount – seasonal discounts are everywhere, but in some industries, it is far more prevalent than others.
- Multiple: Rather than selling a single item for $10, you can sell three items for that price.
You should follow suit, but don’t copy – never, ever copy! You have your own terms, overheads, profit margins and other expenses to deal with. Ostensibly, you have your own pricing formula to contend with, which proves why your prices must be dynamic at all times, ready to be changed without sending your business into a tailspin.
7. Adapt to Changing Markets
If you examine the list of Fortune 100 companies from 50 years ago, you see nearly half of these businesses gone extinct. Indeed, the same will be the case of Fortune 100 firms today in half a century from now. Why? Many enterprises fail to adapt to changing markets, whether it is consumer demand, marketing initiatives, product pricing or evolving landscapes. You should always adapt to the market, even if it seems risky at first – any calculated risk pays off in the future.
In the end, it is imperative that you are still generating a profit. Unless Silicon Valley is backing up your money-losing venture, you still need to be in the black every month. It can be tempting to sell products under market value, but then what is the point if your business cannot stay afloat? By experimenting with the price of any new product, you can see what works and what doesn’t. Hopefully, by the end of it all, you will become a tycoon in ripped clothing, pet rocks and refrigerator magnets.
Do you have any tips for budding entrepreneurs looking to create a pricing strategy? Let us know in the comments section below.