Show Nothing can cause confusion and doubt in a business like pricing your products and services. While you don’t want to charge less than you are worth, you also don’t want to price yourself out of the market, so how do you know if your price is right? Whether you are starting out or starting over, here are five factors to consider when pricing your products and services. 1. CostsFirst and foremost you need to be financially informed. Before you set your pricing, work out the costs involved with running your business. These include your fixed costs (the expenses that will come in every month regardless of sales) and your direct costs (the expenses you incur by producing and delivering your products and services). 2. CustomersKnow what your customers want from your products and services. Are they driven by the cheapest price or by the value they receive? What part does price play in their purchase decision? Also look at what you are selling, are your current customers buying high-end or low-end products and services? This information will help you determine if your price is right, what level of service or inclusions you should be offering and lastly if you are targeting the right market. It may be that you need to change your market to make your business more profitable. 3. PositioningOnce you understand your customer, you need to look at your positioning. Where do you want to be in the marketplace? Do you want to be the most expensive, luxurious, high-end brand in your industry, the cheapest, beat it by 10% brand or somewhere in the middle? Once you have decided, you will start to get an idea of your ideal pricing. 4. CompetitorsThis is one of the key times you can give yourself permission to do a little competitor snooping. What are they charging for different products and services? What inclusions and level of service are they offering for those prices? What customers are they attracting with their pricing? And how are they positioned in the marketplace? The answers to these questions will give you an industry benchmark for your pricing. Get daily business news.The latest stories, funding information, and expert advice. Free to sign up. You'll also receive messages on behalf of our partners. You can opt-out at any time. 5. ProfitOne of the most important questions business owners neglect to ask themselves is, “How much profit do I want to make?” They tend to look at what others charge and then pull a figure out of the air to be competitive without giving consideration to how much profit the want and need. While you may be in business for the passion and to add value to the lives of others, you also need to add value to your own. So give careful consideration to what your time is worth. How do you determine your pricing? This article was originally published on February 24, 2015. NOW READ: “No bullshit”: Atlassian’s Dom Price shares four key ingredients for scaling a startup NOW READ: “Execution is everything”: Here’s the number one reason Australian SMEs are going broke After all the changes in the market in the past year—struggles with supply chain, customer demand, and inflation—many companies are struggling to manage and optimize sales, revenue and profit. Now, then, is a great time to reflect on how pricing strategy and decisions drive sales and revenue. Standard, legacy pricing no longer drives margin goals in today’s landscape. PROS Kim Watson, Director Strategic Consulting at PROS states that “Pricing is always
the most important lever” when trying to resolve profitability issues. A pivot in pricing strategy, then, is the first thing businesses should consider when looking to shrink margin loss and grow revenue. But winging it or making guesses benefits no one: be methodical about it, using analytics and data, usually backed by AI. But before building a new pricing strategy, let’s cover what PROS analysts are seeing in the market. Declining Demand In many markets, when demand declines companies will feel pressure to
discount prices to try to make up for the shortfall. They may even see competitors dropping prices to compete for their own shortfalls. While this is a complicated issue, companies should try to resist the pressure to discount unnecessarily. This is the time to think about other levers to increase the value proposition to the customer to increase demand and sales, perhaps through service features that make it easier for customers to do business with them. Supply Chain Disruptions
and Inflation Many companies struggle to apply the requisite resources to ensure the flow of goods and services in their supply chains. And nearly every industry is struggling with the effects of inflation on sales and profit. But it’s important that companies don’t allow inflation and supply chain issues to dictate or weaken their pricing strategy. Price reductions are very difficult to get back, and it
wrongly puts the attention on the price rather than the service. And price increases can turn clients away and render you not competitive. Reevaluation of Existing Business Relationships Due to the massive disruption to the economy, companies may take this opportunity to re-evaluate the benefits of existing supplier relationships. In the majority of B2B business based on relationships, things tend to run on inertia until something causes a disruption. This reevaluation may include drive your clients to look for other bids. Yet, studies have shown that incumbent vendors are 4-5 times more likely to win RFPs where they have existing business relationships than new vendors, even if the incumbent’s prices are somewhat higher. Because the cost of switching is so high, this is a good opportunity for you, the incumbent, to reinforce the benefits of the existing relationships. Things like trust, institutional knowledge, and organizational momentum have value to existing customers. Show customers that doing business with a new vendor will likely mean extra set up work, uncertainty around service expectations, unanticipated learning and adoption challenges, and a bucket of risks that could potentially disrupt normal business operations. “Hardship” Price Reduction Requests Due to the economic hardship that some of your customers will be required to bear, it’s very likely they will ask for price concessions as the health of their own business is in question. However, if not controlled carefully, lowering prices may become the new normal that is hard to undo. In some situations, it will seem to make sense to try to help struggling customers by selling to them at a reduced price. However, a better approach might be to offer to give them a “donation” of products rather than change the price number. As an example, rather than give a customer a requested 5% discount, a company can make a donation of equivalent to 5% of the cases a customer would regularly buy over a specific time period. In this way, the pricing number stays intact, and it’s easier to avoid setting a recurring expectation that might outlive the current economic crisis. Increased Awareness of the Competition Businesses and consumers now prefer online channels to do business. Since comparing prices becomes easier, companies will have to rely on their unique service differentiators, along with other relationship aspects, to justify newly revealed price premiums. Customers may ask for discounts to match other potential suppliers who may or may not offer similar value propositions. Sellers should monitor the prices in the market; this should be an indicator of what customers are willing to pay for your unique value proposition. It’s also important to make sure your sales and marketing messages communicate what truly sets your company apart from less expensive competition. Things like service, reliability, trust, quality, availability, selection, timeliness, support, and convenience are all considerations for relationships your customers might forego with a cheaper supplier. Demand for a Great UX Price is typically a secondary consideration in most purchase decisions. Other concerns like user experience rise to the top when customers make their decisions on with whom they will do business. What is good UX? Customers want self-serve capabilities, increased personalization of the offer, access to customer service resources online, and a consistent experience across channel. So, providing these improvements to UX boost customer loyalty satisfaction and likeliness to buy—independent of price. Check out these statistics from UX Planet:
Different approaches to gaining new customers For sure, with the changes in the economy, business from other vendors will be up for grabs. Unfortunately, many companies will use low prices as a way to try to take the business away from a competitor. This can be risky because it can sow the seeds of distrust both with the new customer and with loyal existing customers. Rather than try to entice new business with low prices, try using “fair” prices and an incentive to “try out” the new relationship. An example of this might be a monetary credit for products and services purchased in a defined time period for new prospective customers. Technology and Systems Pricing technology (often called price optimization and management or PO&M) supports evolving pricing strategies. PO&M advanced data science and AI can ensure your pricing is rational, consistent, and adoptable. Pricing based on appropriate segmentation and attributes ensures pricing is more likely to be accepted by both salespeople and customers. As more customers move to online channels, it will become more imperative that pricing systems generate consistent and harmonized prices across channels and time periods to avoid mistakes that can weaken customer trust. Both the timing of pricing and the price itself are important aspects of the customer experience and value proposition, as demonstrated by studies that show both willingness to pay and win rates are higher with instantaneous pricing that’s in the right range. Technology is critical to achieving both speed and accuracy. What to do next? Due to the effects of the global coronavirus pandemic, the world is being pushed to change. Companies are facing new challenges, but the choices they make will determine whether they come out of this crisis stronger or weaker. To successfully navigate these changes, most companies will benefit by following a few key recommendations:
If you want to talk to us about how to manage and pivot your pricing strategy with PO&M software you can contact us here. PROS Smart Price Optimization and Management harmonizes dynamic prices across all go-to-market channels, while aligning with market dynamics and maximizing profitability for the company. With the help of PROS advanced AI, businesses can optimize their pricing, in accordance with customer preferences, competitive pressure, and changing market demand. What are the 4 factors to be considered in pricing?Five factors to consider when pricing products or services. Costs. First and foremost you need to be financially informed. ... . Customers. Know what your customers want from your products and services. ... . Positioning. Once you understand your customer, you need to look at your positioning. ... . Competitors. ... . Profit.. What are the 4 factors affecting price sensitivity?There are a number of determining factors for the price sensitivity of a product, such as geographical, economic, sentimental, or the necessities that these entail, the latter being one of the main factors.
What are the major influences on price?Among the many factors influencing the pricing decisions, the three major influences are customers, competitors and costs.
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