My Pricing Model

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Now you have a firm grasp of the industry your business will operate within, including a clear understanding of your competition, it is time to set your pricing model.

What factors affect my pricing?

Too many new entrepreneurs jump to the assumption that undercutting the competition is the best, and often only, way to introduce their new businesses to the market. This is ONE pricing strategy and may not be the best one for you. Here are some key factors to consider before you determine your pricing:

1. 1. 1. 1. Base price
         2. Profit over base price
         3. Industry norms and competition
         4. Target market
      Let’s look at the those in a little more detail.

   Base Price

   Effectively the base price of your service comprises:
   1. 1. 1. • The cost of your (or your employee’s) time to create the product or service
            • The cost of delivering the product or service (from mail costs to fuel costs)
            • The cost of the parts or components or supplies to create/deliver the product or service
            • The proportion of service charges that are used to create or deliver the product or service eg online service charges, bank costs.
         You may even want to include other charges such as building costs, marketing costs, etc. It’s up to you how far you wish to drill down. But until you know these numbers you will not know the real price of providing your product or service to your customer. If applicable, make sure you build in any seasonal adjustments.

         Profit Over Base Price

         Once you have an understanding of your base price, its time to decide how far over that base price you need to go in order to generate the profit for that product or service that will keep you in business. Effectively, ask yourself, how much (or little) am I prepared to work for in terms of this particular product or service?

         Industry Norms and Competition

         Once you have an understanding of how much it is going to cost you to produce your product or service, and also know how much profit you want to make in an ideal world, it’s time to test that requirement against the standards of your industry and your competition. Are you in the right ballpark? If you are much lower, then maybe consider increasing that profit. If you are much higher, you have two choices. The first is to consider whether or not the higher price you want to charge is justified (it may well be). Consider whether you providing: better quality, more flexibility, a higher level of customer care, are you an expert in your field etc? Ensure you communicate the benefits of using your services over others in your marketing and when presenting yourself to your customers. Alternatively, consider the second option: perhaps there are ways of saving money in your production process? Perhaps you can streamline production, reduce some aspects of the service, reduce quality if you are over delivering (thought think very carefully about this last point.) The first option concerns increasing your profits. The second reducing your costs. It’s up to you which way you wish to go.

         Target Market

         The final consideration before you set your prices in stone is your target market. Who is it that you are directing your prices and service at? What is their disposable income? What are they prepared to pay for a service or product of this nature? Are you targeting a more affluent demographic than the average or are your targeting bargain hunters?

         Additional Considerations

         Finally, consider whether you will (or should) use any of the following techniques: Loss Leader: A product or service which is deliberately under priced in order to lead the customer towards further sales of other products or services which are priced more profitably. Introductory Discount: Prices set to be lower than your standard pricing for new customers or to introduce a new product or service. Think very carefully about this approach. At the very least set a specific period of time, or only apply the discount to specific products, or you may find your customers resistant to paying full price in the future – they may adopt an “always expecting a discount” mentality. Grandfather Pricing: When you wish to raise prices but still want to maintain a loyal customer base, consider holding rates for existing clients for all or certain products/services, on an ongoing basis or during a certain period ie a year. Again, you may assume this is necessary when it is not. Customers will often understand that prices will increase. If you are providing good value and a quality product/service, most customers will be willing to pay for it. It is important to think about your approach to “grandfathering in” existing customers now, because it will be asked for and it is as well to be prepared. Bundle or Package Pricing: When you have multiple products or services, which is makes sense to provide together, consider creating a bundle or package with a discount over the cost of the individual items. This approach will appeal to bargain hunters and those who know they will need the other services down the line. Memberships (either free or paid) or Loyalty Schemes: Allow members to purchase regular items at discounts as part of a membership scheme. This is intended to encourage loyalty. If this approach appeals to you, do some research before you start so that you know the best way to structure these offers. Also, think carefully about what items or services will be part of this offer. If there is a minimum purchase requirement per year to stay in the scheme, etc. Sales, Discounts, Promotions: Usually a temporary discounted offer on all or a subset of your products or services. Often these tie into a seasonal period ie Winter Sale,  or an event ie Mothers’ Day Discount Event, or Clearance Sale. Most people will offer a sale or have a promotion at least once a year, more if you are in a retail environment, but that doesn’t mean you must. Consider whether Sales, Discounts, and/or Promotions make sense for your business model.

         Activity

         Spend a moment, now, to review your list of products from the previous Component: Your Products and Services, then write a paragraph explaining your overall pricing approach. To complete the activity, list your products and their prices in your notes, or on the table provided in the worksheet.