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Pricing Your Product

August 19, 2012

Putting a price tag on your product or service isn’t so simple. Firms usually take into account things like research, marketing, competition and other aspects, while there are others that just go with their gut. So how do you price your product? To nudge you towards the right direction, here are a few things that that small business owners should consider before deciding their prices.

Factor #1: Market positioning

As its name suggests, market position is where your business stands in relation to your competitors. Are you going to provide luxury goods, midrange products and services or the budget end? Is your establishment the food stand in the street corner or the gourmet restaurant that serves haute cuisine?

Take note that offering the high-end doesn’t automatically mean it earns more. What’s important is if there is a market that will patronise it. When you determine that there are people who would pay money for what you offer, be ready with appropriate and consistent prices to back your approach and appeal to your target market.

For instance, if you sell luxury sprockets for AU$1,000 and AU$800 per item, but also offer one at AU$10, your customers would largely ignore the inexpensive one and probably presume there’s something wrong with it.

Factor #2: Role of repeat business

Repeat business is business that continues to recur, and as a result, can produce steadier income. When it comes to the product or service that you offer, are you working to establish loyal customers or make the most of each purchase? While the nature of what you’re selling usually determines this (e.g. it’s easier to generate repeat business with consumables), price plays a role as well.

For instance, if your convenience store sells cheaper goods, then customers would think they get a good deal when buying there and return. Notice how pricing strategies like coupons and customer rewards programs are able to generate loyalty and repeat sales?

Factor #3: Use of discounts or free products/services

Companies sometimes give away free samples to introduce products to potential customers for subsequent sales. The idea here is to let the consumer experience the product themselves; if they like it, people will want to pay for it.

There are also firms that sell loss leaders—a pricing strategy where a product sold at a low price or even below cost to attract new customers, increase market share or offer another product/service for larger profits. Sony, for instance, initially sold its PlayStation 3 console at a loss, but made profits selling games for the system.

Factor #4: Is your product/service price sensitive?

Consumers can be subdivided into two types: those who are price sensitive and those who are willing to spend regardless of the price. While many business owners would prefer the price insensitive segment, you should still work to win over the price sensitive ones because it would bring in even more business.

Take smartphones for example: manufacturer Samsung is currently the top phone maker because it offers different versions of its devices, directed at different segments of consumers. While Apple sells more iPhones overall, it remains at number two because it only offers high-end smartphones.