My introduction to the thorny issue of pricing came very early on in my career. As a graduate trainee I was set the task of adding up a whole set of costs to establish the base price for hundreds of holidays. The margin was then added and, there you have it, a how-to guide to pricing! Well not quite.
I remember even more vividly what happened next . Our main competitors published their prices. We spend that day (and night) comparing all our prices and undercutting the same holidays by £5.
Just out of the cotton-wool world of academia this was a real eye-opener for me.
There are many, many pricing strategies and it is a hugely complex subject best approached with an expert. For small and medium businesses though here are a few of the most common pricing approaches:
- Cost plus pricing – add all the costs associated with the product or service you are selling (not forgetting you margin) to determine your price
- Competitor based pricing – if your product or service is similar to your competitors check out their pricing structure and set your prices accordingly
- Market based pricing – determine what your target customers are willing to pay for your product or service and use this as a guide.
In reality most small businesses will use a mix of all the above methods to set their base prices. It is important to have a robust pricing strategy in place, particularly if you plan to employ tactical pricing initiatives such as discounting…then that’s a whole different subject!