Beyond the numeric calculations, pricing involves a solid knowledge of your industry and a clear picture of the position you plan to take in the marketplace. In fact, pricing is a crucial element of your overall marketing strategy.
"There is a direct and strong relationship between the prices you charge and the image of your company," says Erin O'Donnell of Pepper, O'Donnell & Co. Inc., a marketing and public relations firm in Winter Park, Florida. "For example, do you want to be viewed as a no-frills, low-cost operation, or as a high-end, full-service company? One is not necessarily better--or more profitable--than the other. What is important is that your pricing structure be compatible with the image you want to create."
O'Donnell recalls a client whose sales rose dramatically when he increased his prices. "He was a consultant, and his product was information," she says. "In the lower price range, it had a lower perceived value--that is, his clients thought that what he had to offer couldn't be worth much if he was charging so little for it. But when he started charging more, the perceived value went up, too--and so did his sales."
While it's important to consider the perception of the marketplace, O'Donnell stresses that a strategy of raising prices to increase sales won't work for every product. "Once you've decided on a price, do some market research and testing on a sample market before you do a full-scale product introduction," she advises. "Testing gives you room to make adjustments in either direction if you need to."
Remember that pricing is an ongoing process. Regularly evaluate your prices and be prepared to change them if necessary or appropriate. If yours is a business that includes making written bids and proposals, O'Donnell advises guaranteeing your prices for a specified time.
"Raw material prices can be extremely volatile," she says. "Your business may be able to absorb small increases, but major cost jumps can wipe out your profits. Ask your suppliers how long they will guarantee their price levels, and then do the same for your customers."
Finally, O'Donnell says, if you choose to make price a key selling point, be prepared for fierce competition. "Customers who come to you strictly for price will leave you for a better price," says O'Donnell. "Certainly, most industries are extremely cost-competitive, but give your customers more than price as a reason to buy from you."