Pricing Methods: The Ultimate Guide for Setting Prices, Raising Revenue, and Making Sales
Originally published at Biohacking Entrepreneur.
Sales for Startups: Part One
In this series, we will be discussing how the successful entrepreneur can optimize their sales approach, including pricing strategies and methods, building customer relationships, and some of the most effective hacks for increasing sales and turning your startup into a profit making business.
You have created a product or service, but can’t decide what to charge for it. Should you shoot for covering expenses, plus a little extra, so you can make a quick break into the market by being cheap, or should you set your prices based on the competition? Or perhaps you are further down the road with your business. You are developing the traits of an entrepreneur, marketing to the right people with a target customer profile, and creating value for customers. Yet, your startup is still not making profitable sales.
Whether your goal is to set prices, raise revenue, or simply to make more sales, this pricing strategies and methods guide will give you everything you need to get started. We have pulled together some tried and true tactics for the following:
- Pricing Methods
- 6 questions to help determine which pricing strategy is best for your business
- top pricing methods (and when to use each one)
- 8 strategies for changing prices without alienating your current (or future) clients
- A FREE guide including 6 ways you can make your first sale!
Pricing Methods (and when to use them)
Unfortunately, there is not a single pricing method that works best every time. You must evaluate your business’ brand and goals in order to determine which of the following will work for you. Here are some questions you can ask to help prepare yourself to pick, or change, your pricing method.
6 Questions to determine which pricing strategy will work best for your startup
- Who are we targeting/what is our image?
Are you targeting wealthy individuals, who want a superior product regardless of price and perform less cost comparisons during purchasing decisions? Or are you targeting the discount shoppers, who are always looking for the best deal?
2. How hard will it be to change the price in the future?
While we will discuss some strategies for changing prices later, these strategies may not always be effective in certain situations. It would be fairly hard (although history shows, not impossible) to change the pricing of items on a Dollar Menu at a fast food restaurant. Is a large part of your appeal or marketing based on a very specific price point?
3. What are your fixed costs/cost per product?
It is especially important for a startup to run these numbers thoroughly and ensure their pricing model will cover these costs.
4. Are there any governmental or market pricing restrictions in place?
Check to make sure there are not any laws that may require you to set your pricing at a set level.
5. What are your financial goals?
Are you planning on maximizing profit or revenue within the first few months? Are you expecting a large amount of sales (allowing you to set a lower profit margin), or fewer, more sporadic sales (requiring you to set a higher profit margin).
6. What is my customer willing to pay?
Even a small survey of your Facebook friends is better than no market research at all. Provide a multiple choice question, asking at which prices they would be willing to pay for your product.
Now that you have a basic idea of some of the factors that will influence your choice of pricing strategy, review the following pricing methods with them in mind.
Replacement or Cost-Based Pricing
Cost-based pricing takes the cost of your product and adds a profit margin. This is one of the simplest pricing methods to implement, just make sure you aren’t forgetting about any non-cash costs (labor, your time/management) when running the equation.
e.g. It costs $3 to make a burrito. You decide you would like a profit of $2 per burrito, so you sell the burritos for $5.
Works best for:
- Companies with limited competition (this model does not factor in competition)
- Companies that expect minimal changes in customer demand (this model does not take into account the impact any fluctuations in supply and demand may have on price)
Market Comparison or Competition-Based Pricing
Competition-based pricing methods are based on your competitors’ prices. This requires that you complete some research into the market and why customers pick your competitors, however, this does not always mean you set your price at, or below, their rate.
e.g. Joe’s Burrito Bureau up the road sells burritos for $5. You can:
- lower the price, in an attempt to gain some of Joe’s market share if you believe that enough of the market does not hold a strong brand loyalty to Joe’s
- raise the price, if you believe you can convince the market that your burritos are superior to Joe’s and that enough of the market makes their burrito purchasing decisions based on quality (not on price)
- set your price per burrito the same as Joe’s and attempt to differentiate yourself in other ways
Works best for:
- Companies in crowded markets, who know that their costs are similar to the competition (if you focus too much on the competitor’s price, you can lose sight of covering your own costs)
- Companies who believe they can distinguish themselves as a “discount store” without getting into a price war
- Companies who are not facing large, corporate competition (big businesses can more easily match, or undercut, a startup’s prices)
Discounted Cash Flow/Net Present Value
Setting your prices based on a discounted cash flow analysis is more complicated than some of the other pricing strategies and is not always applicable. This method takes into account the future value a sale will hold, as well as the present value.
e.g. You start a weekly burrito club for $16 per month. Even though you are making one less dollar per burrito, you are guaranteed a greater amount over the whole month than you would by selling a single burrito.
- Subscription business models
- Services that are believed to encourage an upsell in the future (perhaps you sell a trial subscription with a lower profit margin, in the belief it will encourage those customers to purchase a full subscription in the future)
Value Comparison or Value-Based Pricing
The value-based pricing strategy sets price equal to it’s worth to potential buyers. This requires a fair amount of market research, customer surveys, and targeted marketing.
e.g. If your patented magical burrito makes those who consume it immune to disease, it will save them $2,000 in medical bills per year (based on your market research). Pricing your burrito at $300 (a fraction of the amount they will save), seems more than reasonable.
With this pricing strategy, you must also be aware of what your customers consider the “fair value” of your product. If it is very obvious to them that it only costs $3 to create each burrito, it will be hard for them to justify paying $300, regardless of the benefits.
It would be hard to discuss a great example of product value without bringing up Apple. Whether you love or hate them, you have to admire their ability to build such a fiercely loyal customer base and break out in to new markets time after time with such success.
Why has Apple seen such success with their products?
Their services (computer repair, tech support, etc.) are not what they are known for and not what drives people to their products.
The amount of free resources and information they provide to potential customers is minimal and is not what brings people back to the Apple store.
What sets them apart from any other manufacturer of computers (or mp3 players, or streaming devices, or…)?
Simon Sinek, a leadership expert and author of “Start With Why,” has a convincing theory.
All companies know what they do.
This is the products and services they offer. Apple creates great computers. This is what they do.
Some companies know how they do what they do.
How does Apple create great computers? They create computers that are beautifully designed, simple to use, and user-friendly.
Very few companies know why they do what they do.
Because of this, most people build their value propositions on the what and the how, the two things that are easiest to put in to words. For example:
How to Raise Prices Without Losing Customers
So, you have identified a new pricing strategy you would like to try, set a new financial goal you would like to reach, or perhaps you miscalculated your costs and now you realize you must raise your price.
Panic begins to set in, as you think about the outraged emails you will receive and the customers you will lose upon making this change.
First of all, stop worrying. Costs fluctuate, therefore, prices fluctuate. Most people realize this and will not be shocked when hearing about a price change.
Second of all, there are plenty of strategies you can use to minimize the impact of a price raise. We have outlined 8 of the most effective hacks you can use to increase your sales, even while increasing your price.
8 of the Most Effective Strategies to Raise Prices Without Losing Sales
- Target a new customer group
Look at your market research. There are certain customer groups that are known to spend more on certain products.
For example, parents generally spend more on their first child than on their second.
If you focus on a more affluent customer group, who focuses less on price, does less comparison shopping, or you can target with other differentiators of your product, you can raise the price with less of an effect on this group’s purchasing decisions.
Let your customers know why there is a price increase. Did the cost of your non-GMO, 100% organic black beans for your burrito go up in price due to decreased rain this year? Let them know and remind them of the benefits of your super-special black beans.
Don’t just explain the price increase. Educate them of the benefits of your product or service. Remind them why they should continue to chose you.
If you are making changes to and improving the product, consider relabeling it. Make sure you distinguish your new product and the additional benefits to help justify the higher price. You can always phase out the old product slowly if you think it would help.
3. Apply the price increase to new customers only
Start out by testing the new price with new customers only.
Inform your current customers that you are changing your pricing structure, but that it will not affect them for the time being. This can help increase brand loyalty with your current customers, as they feel they are getting a “loyalty” bonus.
If the price increase tests well with new customers, you can eventually phase out the legacy pricing over a few months and/or a year.
4. Make it feel like a decrease
You can change the psychological impact of a price change a few different ways.
You could separate the different components of your product or service and begin selling them separately.
You could change the payment frequency, so that they are paying a lower amount on a more frequent basis.
Regardless of how you accomplish this, we are not suggesting you expect your customers to believe they are paying less overall. You are simply restructuring things to make it more psychologically palatable.
5. Offer a lower plan with less value
Offer a plan at the same (or lower) price you currently have your service at, but with less bells and whistles. This way, if the dollar amount was the most important aspect of your service to someone, there is still a solution for them.
However, make sure you emphasize on your landing pages the advantages of the higher plan. If done incorrectly, this can lead to more customers purchasing the cheaper plan, instead of the new plan.
Steps you should take with any price raise
Regardless of the strategy you implement when raising prices, you should always complete the following steps:
- Give fair warning to your current customers.
- Do not apologize for the price increase. Instead, emphasize and prove your value.
- Do not make a drastic price change all at once. Customers are often more open to a gradual price increase over time, rather than a drastic price increase all at once.
Setting and changing prices can be a complicated and anxiety inducing process, but it does not have to be. Educate yourself on your market, your customers, and your business’ financial needs. Armed with that knowledge, you will be well equipped to raise revenue and make more sales with your pricing methods.
Ready to make more sales? Enter your email at Biohacking Entrepreneur receive our list of the top 6 methods for chasing down your first (or additional) sales!
- Get to know the following before picking a pricing strategy:
- Do not be afraid of the price-setting or changing process. Be mindful of how your prices are perceived and utilize an effective strategy for putting any changes in a positive light for your clients.
In the next part of our Sales for Startups series, we will be sharing how to improve your sales approach through building customer relationships. Subscribe below to receive the latest business tips and hacks for entrepreneurs.
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Originally published at Biohacking Entrepreneur.