The ability to capture as much margin as possible per sale, and generate as many transactions as possible, contributes to the profitability of your business.The ability to capture as much margin as possible per sale, and generate as many transactions as possible, contributes to the profitability of your business:
There are a couple directions you can head when it comes to pricing your product/service:
- Cost-plus: adding a % margin above variable costs
- Value-based: aiming the price just below the perceived value to the customer
The more alternatives a customer has to solve their problem, the more of a commodity your offering becomes. For example, with a gas station at so many intersections, it would be surprising to see prices be drastically different within the same town.
Applying the principles of supply and demand, it's often the case that as you charge more, fewer customers will be willing to value your offering above your asking price.
Of course, there are plenty of exceptions to that rule. In fact, the higher perceived value of an item can actually lead to more sales if there's a fit with customers. Also, lowering the price too far can cause buyers to question the quality.
If you're offering a product that is similar to what the customer can find elsewhere (more of a commodity), consider these cost-plus questions:
- How are other businesses pricing their similar products?
- How low can I price before I struggle to break even each month?
- What % markup is industry standard?
If your product or service doesn't have many clear alternatives, consider these value-based questions:
- What is the pain that my product or service is addressing?
- What is the cost of my customer not doing anything (this can inform what they may be willing to pay)?
- How are other similar businesses offering value-based products?
- If my potential buyer balks at my price, what can I remove from the offer (in order to lower price) that doesn't negatively affect the quality or outcome?
The reality is that the question around pricing is actually a question about human behavior--the greatest variable of all when it comes to running your business.