How much is right? How to fix prices in your small business.
Who remembers the old groove “Price tag” by Jessie J? Well, In business, it is about the money. We find the balance between happy customers and a healthy profit, talk about a win-win situation. Customers get value. Business gets cash to keep the value creation process for people sustainable.
How much you sell your products or services definitely affects your business. if you sell at a low price in a bid to drive more customers through your front door, you may lose out on profit, or even brand value. If you sell at a higher price, you may lose out on sales (and profit, eventually, especially if your business is marked by volume of transactions).
“Find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price.” - W. Chan Kim (Blue Ocean Strategy)
In this post, we discuss the different ways you can set prices for your products and services in your small business. If you have problems with calculating your costs and fixing a profitable price, check out this post, still need help? you can talk to us at Triift Africa, we would love to help you.
Cost vs. Value
There are two major strategies to fixing the prices of products and services — the cost-based pricing and the value-based pricing. Each of these strategies has a number of techniques and factors to consider before you choose one.
Cost based pricing sets a minimum and maximum price range using how much you spend to make or buy the product plus a profit percentage. This means that your prices are mostly fixed unless there is a change in the cost of production or sales.
This method of pricing is mostly used by supermarkets because they sell a variety of products and their profits are based on how many products they sell (Volume). This is why you can get the same item at different supermarkets for almost the same price. The little difference is usually in their profit percentage.
- Your market is sensitive to price: When buying from supermarkets, people want to save the most. This is why Shoprite leverages on “lower prices you can trust always”. Nobody wants to buy tissue paper for N100 if they can get the same size at N50.
- You produce or sell large volumes: You know why the traders in traffic run after buses to make just one sale? Their total profit depends on how many bottles of coke they can sell before the day runs out. If you are in a business that sells a lot of its products fast, you should use the cost-based pricing.
How to Decide on Your Profit Margin
Your profit margin is your mistake margin. It is the percentage difference between your cost of sales) and your selling price. Since cost-based prices depend a lot on your market, you should know the average price of your product in the market. How much do people currently pay? You should also know what costs you incur.
The Value-based pricing techniques depend on the worth of your products or services to customers and how much they are willing to pay for it.
Use Value-Based pricing if you already know what extra value you add and how much people are willing to pay for it. Gokada uses the advantage of speed and safety to sell their transport service. During traffic gridlocks, their prices rise because they know that customers are willing to pay more to get to their destinations faster and safer than the regular motorbikes.
The downside of value-based pricing is that other businesses can be created to provide the same service at a lower price to woo your customers. Businesses that use this cost model have over the years built loyalty and trust with their customer base, so it’s more than just price. Also, if the value attached to your products or service is lower than your costs, you will eventually run at a loss.
At Triift Africa, we encourage small businesses to focus on creating a bond with customers through brand identity and value-added services, thus transforming them from more than just customers to brand advocates.
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