Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Increase Your Business Profits By Developing A Well-Studied Pricing Strategy

Summary

As a business owner, you put effort, time and money into developing and providing high quality products or services, creating a professionally looking website and maintaining a positive relationship while.

However, are you aware of the impact that pricing can have on your company’s value and revenue? According to statistics, even the smallest improvement in pricing strategy can significantly boost profits, which is crucial for the growth of any business, regardless of the industry. Undoubtedly, developing a well-studied pricing strategy is an integral part of any successful business. Even if you do not realize it, the price of your products or services reflects not only the type of customer you are trying to reach, but also the amount of energy you are putting into customer satisfaction. You probably heard ever since your humble beginnings as an entrepreneur that charging the right price for your offerings might prove to be very challenging because you cannot think too high or too low.

Making a clear distinction between cost, price and value is extremely important

Before even developing a pricing strategy, you have to understand certain important details. For instance, are you able to make a clear distinction between cost and value in order to increase profitability? Starting with the basics, in order to manufacture a certain product or provide a certain service, you have to invest a certain amount of money first. This refers to the cost. When establishing the price for the respective product or service, you must make the necessary calculations to recover a part of the money invested at the beginning for the production. Therefore, you know the costs and you have the possibility of setting a price.

Furthermore, price and value are two different concepts because value refers to the worth of your offerings in your customers’ eyes. They do not have information regarding the real amounts involved in the process, but they can approximate a fair price. The main idea is that, if you set a higher price than expected by the public or established by the competition, you will notice a considerable drop in sales. On the other hand, going to the other extreme might also prove to be a big fail because your customers will believe that since your products or services have such a low value, they are not qualitative.

The basics of price analysis: how businesses can use it in their advantage

After clarifying these aspects, the following question inevitably arises: how do you guess customers’ expectations? The answer is “price analysis”, which has the purpose to help you assess the reasonability of your prices while considering the type of market where your business operates. There are three key components that you must analyze namely published prices, market prices and historical prices. In what concerns the first two, all you have to do is navigate on different websites selling similar products or services and compare the prices. When it comes to the latter, you might have to discuss directly with the manufacturer or redirect your attention towards industry peers. This will give you an idea about previous prices. More importantly, these two steps or methods will allow you to recognize any escalation in relation to the price over time. Under no circumstances, you should downplay the importance of research when developing an effective pricing strategy.

Must-follow steps when developing the right pricing strategy for any business

When creating a pricing strategy, you must keep in mind three important factors: costumers, competition and your business goals. Thus, what are your main business objectives? Do you want to penetrate a different market? Do you want to introduce a new product on the current market? Do you want to expand your customer base? Do you want to improve cash flow or increase profitability? Once you find the answer, you can move on to conducting a market pricing analysis and evaluate your target audience. You will notice that certain providers focusing on a broad audience display low prices while other high-end providers target a specific and different audience who afford buying their superior products or services. Obviously, you will have to determine the category in which you fall. After establishing your target audience, you have to think about the reason for which people will purchase your goods and how they intend to use them. Does your product or service meet their needs? Since you are operating in a competitive landscape, you have to peek from time to time in order to assess the evolution of your competitors; in this case, the pricing strategy used by them to increase profits.

Different pricing strategies that all businesses apply at some point for increasing sales

Moreover, you have to identify various types of pricing strategies including premium pricing, economy pricing, psychological pricing and bundle pricing. The first one becomes useful when you introduce a new product or service on the market that presents obvious benefits in comparison to similar products already used by customers in the past. It is common sense, but this type of product or service deserves a higher price and the customer knows it, especially if you know how to create the perception of superior quality. With economy pricing, you can only gain small profit. Instead of providing a single product or service at a high price, you offer multiple products or services at a lower price. This proves to be quite efficient for large companies, but not suitable for small businesses.

We cannot tackle psychological pricing without including the famous “left-digit effect”, which is incredibly simple. Just by seeing $2.99 instead of $3, the customer perceives the respective offering as substantially cheaper. Practically, you are manipulating the public’s emotions. Bundle pricing truly represents a smart method of selling more products faster, especially those items that occupy valuable space. You just create a package including multiple products and set a fair price, at least in the customer’s mind. For instance, you are not selling a carry-on luggage for $39.99; you are selling a two-piece set of different sizes for $49.99.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.