Correct pricing of your product and services
By Mbo Luvindao
Manager: Bank Windhoek ESME Branch.
It is no secret that the success of small businesses is vital to the success and wellbeing of any economy. However, to succeed, business owners must effectively manage multiple aspects of their enterprise. One such aspect is pricing. If priced too high, your products could be too expensive for your target customers and if the price is too low, you could price yourself out of business. Here are a few matters to consider when deciding on an effective pricing strategy:
Your customers and your market
Understanding your target market is the first consideration when deciding on a pricing strategy. Who is your target market? What is their demand for your product? How much do your prospects have to spend? How much are they prepared to pay for your product? To determine this, one may consider how much prospects are currently paying for a competitor’s product. This method should however be used with circumspection as simply matching your price may be dangerous.
Understand your costs
Another important aspect of pricing is understanding all of the input costs of your business. Simply matching your price to that of your competitors is dangerous is because it often does not take into account what it costs to manufacture your product. Your pricing must cover all costs related to the product and also factor in a profit margin. At this point, one should also consider a break-even point and the fact that the cost of a product must direct costs and overheads.
Know your competitors
While simply matching the competitors’ prices is dangerous, understanding the reason for their price is also very important. Questions that warrant further investigation include asking a few important questions. What pricing strategy has the competitor employed? What added value do they offer customers and how does their product compare to your own.
The choice and implementation of an effective pricing strategy will vary based on sector, product and business goals. Here are a few important pricing strategies that entrepreneurs should consider:
Pricing for market penetration: a pricing strategy that sets a low initial price for a product. The goal is to quickly attract new customers based on the low cost. The strategy is most effective for increasing market share and sales volume while discouraging competition.
Cost-plus pricing: a pricing strategy in which the selling price is determined by adding a specific amount mark-up to a product’s unit cost. An alternative pricing method is value-based pricing.
Premium pricing: pricing is the practice of keeping the price of a product or service artificially high in order to encourage favourable perceptions among buyers, based solely on the price.
Competitive pricing: the process of selecting strategic price points to best take advantage of a product or service based market relative to competition.
Bundled pricing: In a bundle pricing, companies sell a package or set of goods or services for a lower price than they would charge if the customer bought all of them separately. Pursuing a bundle pricing strategy allows you to increase your profit by giving customers a discount.
Pricing strategies are important and businesses can use a variety of these strategies when deciding on a price for a product or service to maximise profits. Though these strategies may seem daunting at first, basic market research and a competitor analysis can provide invaluable data for entrepreneurs to make informed decisions.
In addition to our banking products, Bank Windhoek also offers Mentorship Services to qualifying SME customers to help them grow and make a success of their businesses. Contact your nearest Bank Windhoek branch for more information on our offering to SMEs.