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You can’t open a business without answering this fundamental question: How much do I charge? Even with an answer in hand, you may find sales are slow, an indicator you may be charging more than customers will pay. Or your sales are great, but you’re charging too little for a healthy profit.
Pricing is one of the hardest business aspects to get right. I built several software products for startups and large businesses where I was responsible for pricing. I know the challenges of getting pricing right while factoring in considerations such as costs and profit margin.
Pricing is tough because it involves many variables. It affects all business areas, including sales techniques such as how to prospect for sales, sales forecasting, and the entire sales cycle. A pricing structure solves these issues and helps you achieve your pricing goals.
A pricing structure defines and organizes prices for your company’s products and services. The objective is to charge a rate that aligns with your pricing strategy while balancing profits with what the market will bear to avoid over- or under-charging customers.
A pricing structure prices products and services so that it makes sense to customers and gets them to buy. For instance, you might offer a discount when customers buy more than one product.
Several pricing structures exist. These are common ones:
Prices are dynamic. Your competition may change prices. Your costs increase as suppliers charge more. The pricing structure keeps you organized in this dynamic environment.
A robust pricing structure is important to maximize sales and profit. If your pricing structure is too simplistic or lacks price controls, particularly in B2B sales, you end up with prices all over the map.
I’ve seen firsthand how sales reps abandon the price list to make up their own pricing. In these cases, the business loses money because of unnecessary discounting and lack of price fences.
Pricing strategy is the overarching approach used to set pricing for a company’s products and services. It doesn’t define actual price points, but the pricing structure is a consequence of the strategy, and it’s where you set the price customers see.
You must first set a pricing strategy before you can build a price structure since the former dictates the latter. Netflix is a good pricing structure example. It uses a value-based pricing strategy to lure customers from cable television subscriptions.
Netflix applies a tiered subscription pricing structure to articulate its pricing strategy. The tiered pricing enables customers to choose an option based on their needs, such as selecting a higher priced plan for high-definition picture quality. Netflix uses a free trial as a carrot to get sign-ups.
Pricing structures can be simple or complex. Start with a simple approach to avoid becoming overwhelmed by the process, especially if you sell several products or services. Then evolve your pricing. These steps show you how.
Before you tackle pricing, do your homework. Research and understand your target customers, the competition, and the marketplace. Depending on the industry you operate in, other factors may affect price, such as local laws and industry regulations.
Business costs are the other research area. These costs aren’t limited to the production of your goods or services. Rent, employee payroll, taxes, Sales and marketing, and other factors contribute to your costs.
This information influences your pricing strategy. Once a strategy is in place, you’re ready to build your pricing structure.
This first step is the foundation for effective pricing. These tips can help.
You’ve done the research and set a pricing strategy aligned with your company’s positioning, which defines how your business is presented to customers. Now decide how to measure your sales.
Do you track the number of units sold? Is your business subscription based, so you’re looking at subscription sign-ups? Do you employ a sales team? If yes, track the number and amount of closed sales.
These success metrics help you identify your pricing structure and measure its effectiveness.
Your business flies blind without metrics. Define them with the suggestions below.
Establish a base price to build your pricing structure. The base price is the foundation for pricing decisions, even if the amount isn’t applied to all offerings.
The base price gives you a starting point from which to assess higher price points, how much to discount when you want to generate demand, and other pricing decisions.
Setting your base price can prove tricky. These recommendations can help.
This is the culmination of the other steps. Using your success metrics and base price, model how you see your business growing.
This pricing model helps you assess which pricing structure makes the most sense. For instance, with vacation rentals, if your business is seasonal, your model should account for more units rented during your high season.
You can modify your base price up or down to evaluate the impact on revenue. From there, try different pricing structures to determine how you want to price your offerings.
This is where the rubber meets the road. Here are suggestions to help.
Despite your best efforts, you won’t know how customers will respond to your pricing until you try them. Some business owners are hesitant to test, thinking once a price is in front of customers, it’s difficult to change without alienating them.
That’s not the case. Today’s customers are used to dynamic pricing. Think of airlines that change prices daily, or companies such as Amazon, where the price for goods can suddenly plummet through their lightning deals before rising back to full price.
Introduce your pricing structure, collect real world data, and see how your success metrics are trending. Customer engagement software, such as CRM software, collects customer data you can use for this exercise.
Get a baseline, such as a month’s worth of sales. Then experiment. See what kinds of pricing approaches drive sales or help you grow market share, then double down on those to grow your business.
If you don’t test and experiment, it’s an uphill battle to grow.
Pricing is a lever to grow your business, and its impact on your customers is the most important factor in choosing the right pricing structure for your business. Prices that draw customers in but aren’t profitable are as bad as prices that drive customers away.
Apply a pricing structure that strikes the right balance and makes the most sense for your business model and customers. Experiment to find that balance, and watch your profits grow.
Our Small Business Expert
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