Of all the major concerns facing new business owners, how to price products and services is one of the most important-and one of the most mismanaged. Often with little or no market research, many managers overprice or undervalue their products, only to be disappointed when sales don't meet their expectations.
To avoid a similar fate, you must ensure that the reasoning behind your pricing strategies is based on current market research and sound business principles. Moreover, you should clearly identify and understand the many factors that affect pricing, and learn to deal with those that can have a major impact on your prices in the future.
Some of the factors that affect pricing - such as the choice of suppliers, the location of your business, and operating expenses - are well within the domain of control for a business owner to set and adjust as needed. However, there are also factors you have little control over; the country's economy and aggressive new competitors are common examples. The key to dealing with these "uncontrollable factors" is adapting your sales strategies to overcome their negative impact on sales. For example, if a larger competitor launches an aggressive price-cutting campaign that you are not able to match directly, you may choose to maintain your prices and instead increase the value to your customers through incentive programs or special offers.
When deciding on a price level, there are four methods commonly used by companies: cost plus mark-up, leader pricing, odd-even pricing, and image pricing. The cost plus mark-up method is based on a predetermined margin between your cost and the retail price that is sufficient to cover operating expense and earn a profit. In contrast, leader pricing sets the prices for certain products below cost to attract consumers to other regular-priced merchandise and services. Market studies have shown that consumers tend to see prices ending in ".99" as being less expensive than prices ending in ".00", and this research forms the basis for odd-even pricing. Finally, unlike the methods described thus far, image pricing tends to gravitate towards higher prices in hopes of reflecting a premium or exclusive product/service.
Some new business owners make the mistake of using only one of the four basic pricing methods. In reality, for most businesses the most effective pricing strategy is often a combination of the pricing methods outlined above, coupled with well-developed sales and marketing strategies.
