Maximize How Much You Can Charge

Pricing your products or services correctly is at the heart of a successful business. Price too low, and you won’t bring in enough money to offset your expenses. Price too high, and you could exclude yourself from the marketplace (especially if your competitors have better deals).

Pricing doesn’t have to be difficult, though. Here’s our step-by-step guide to understanding exactly how much to charge so you can maximize sales, revenue and profit.

Get a Deep Understanding of All Your Costs

Before deciding how much to charge, you have to understand exactly how much it costs you to produce the products or services you sell. Our guide to maximizing your profit margins explains all this in detail, so we recommend you read and apply that now.

Once you understand all the costs (per product, operational and hidden) incurred by your business, you have a starting point for pricing decisions

Your business, The Blue Widget Co., works out costs as follows:

Cost per item: $2
Operational costs: $10,000 a month
Hidden costs: $5,000 a month
Widgets sold a month: 10,000
Cost: $10,000 (operational) + $5,000 (hidden) = $15,000
Per unit cost: $15,000 / 10,000 units sold = $1.50
Total cost: $1.50 per unit + $2 (raw material costs per item) = $3.50

Analyze What Your Competitors are Charging

It’s a competitive marketplace, so understanding how much your competitors charge for similar products and services is vital. First, learn who your main competitors are and review the products or services they're selling. Find the ones closest in form, function, design and purpose to your products or services.

Then, make notes of how much your competitors are charging and see how that differs from your own price thinking and costs.

You notice that White Thingamajigs produces similar widgets to yours. They are pricing their widgets at $7 each. Assuming roughly equal costs to you, that means their profit margin is around 100 percent.

Figure Out Roughly the Size of Profit Margin You Want on Each Item

Now that you understand your costs and what competitors are charging, estimate the prices you want to charge. Bear in mind that any profit you make will contribute to your free cash flow, and you can use that to expand your business further.

Once you have your pricing, start marketing and selling your products or services. Take careful note of exactly what you are selling to whom and how it's marketed.

You decide to charge $6.50 per widget, slightly undercutting your competitors but still delivering a good profit margin.

Tweak Your Prices Up or Down Slightly and See How That Impacts Sales

Sell items at your initial price so you can establish a baseline of volume, revenue and profit. See how much total revenue you’re bringing in and how that translates to your bottom line.

Once you have a baseline, you can tweak your pricing slightly. Try raising or lowering your prices in small increments to see how that impacts sales. You can either do this across the board or use promotions and discounts to give specific buyers a price break.

Make a careful note of how variations in pricing impact your volume, sales, revenue and profits.

At the baseline price of $6.50, you sell 10,000 units a month and generate $30,000 of profit. Pricing your widgets at $6 increases sales volume by around 30 percent, generating $32,500 of profit. Pricing them at $7 reduces volume by around 20 percent, generating $28,000 of profit. You decide to reduce pricing to $6 per unit.

Look Into Tiered Pricing

Now that you know how much to charge for an individual product or service, you can start to explore tiered pricing. This just means offering different versions or variations on products or services, and it lets you charge different amounts accordingly.

For example, you can offer a stripped-down version with limited features and functionality for less, and a more powerful version with extras for more. Your underlying costs will vary as a result, but this allows you to appeal to a broader consumer base.

You create a “Budget Blue” widget that you manufacture for $2.80 and sell at $4.95. You also begin manufacturing a “Bling Blue” widget that costs you $4.50 to make and sells for $8.95.

Offer Discounts for Higher Volumes

Think about offering discounts if buyers want more of your product or service. This can be an excellent way to get wholesalers and other retailers to sell your product for you. Run various pricing models comparing volume and discount rates so you can find optimal pricing depending on how much you’re selling.

You offer discounts of 30 percent on your widget pricing if buyers purchase 1,000 or more units.

Step Seven: Think About This Advice

Above you will find all the basics of pricing strategy, but there’s a lot more you can do too. Consider these tips to enhance your pricing structure even further.

Remember That Price Isn’t Everything

Customers may not be after the lowest prices. They may want faster service, higher quality, extra functionality or something else. Don't forget to identify and communicate the true benefits of your products and services apart from the price.

Look Into Promotions and Discounts

You do not need to adjust pricing permanently. Instead, you can use promotions, coupons and discount codes as a marketing tool. This is a useful way of experimenting with pricing without taking on too much risk.

Reduce Your Costs

Remember, raising profits isn't just about charging customers more — it’s about paying less in expenses. Look at all the costs that go into producing products or services and see how you can reduce them. If you can reduce base costs, you can reduce prices without too much of an impact, which can give you a competitive advantage. One way to do that is through optimizing business processes.

Ask Customers How Much They Would Pay

It might be time to see how much customers and potential customers think your products or services are worth. Conduct some anonymous surveys to work out how much they would be willing to pay. This is also a useful way to introduce your tiered pricing model.

Keep an Eye on Competitor Pricing

Your pricing doesn’t sit still, and neither will your competitors'. You should review the marketplace on a regular basis, see how much competitors are charging and react accordingly.

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