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There are several important decisions business leaders need to make when they first launch their new venture.
You need to decide when you’re going to start hiring employees and which staff members you should add first. You’ll also have to choose a specific target market and determine when and where to sell your products or services.
Perhaps one of the most important choices involves deciding how you’re going to price your offerings for the current market.
Pricing can make or break your company.
Choose a price that’s too high, and you risk chasing away customers on a budget. Set it too low, and you convince your audience that you’re not worth their money.
Today, we’re going to look at some of the steps you can take to determine an effective pricing strategy for your new company.
Know the Basics of Pricing Strategies
The first step is understanding what a pricing strategy actually is.
In simple terms, your pricing strategy is the model you use to establish the cost of your product or service.
You’ll need to ensure the pricing strategy you choose allows you to cover the costs of manufacturing goods and shipping them to customers if you’re selling physical products.
If you’re selling a service, you need to consider factors like employee time.
Pricing strategies often differ depending on the value of your products and services, the fixed and variable costs your company needs to cover, and the spending power of your audience.
You should also consider the pricing structure of your competitors too.
Conducting a pricing analysis allows you to evaluate the current market demand, so you can choose a price that suits your intended audience and brand position.
Start by:
- Determining the price of your product or service: This includes the cost of labor, time, and any investments you need to make into materials.
- Evaluating your target market: Understand your target audience and determine how much spending power they have based on their likely income.
- Analyzing your competitors: You don’t have to price your products at exactly the same rate as your competitors, but the costs should be comparable.
All of these will determine the value you can set on your offer.
Explore Common Pricing Strategies
Once you know what kind of factors might affect your pricing choices, you can begin to look into the more common options among small business owners and innovators.
Generally, it’s best to avoid the competition-based pricing strategy, which involves constantly trying to choose a lower price than the competition.
It is likely that companies with more experience in the market than you will be able to work with suppliers and explore new ways of reducing prices to undercut yours.
If you want to keep your business afloat, you need to differentiate on more than just low pricing alone.
Let’s look at some common and effective pricing strategies.
Cost-Plus Pricing
This pricing strategy involves finding the cost of producing your product or service, then using a slight markup for your profit.
For instance, if it costs you $25 per user to run a server that you’re selling for hosting purposes, then you might charge $50 per user to get a $25 profit and pay for the overall running costs.
Freemium Pricing
This is a method that involves introducing your audience to a product or service and getting them hooked on the “free” experience, so they’re willing to upgrade to a paid version.
Freemium pricing gives your audience a taste of something, then promises them a wide range of new features and extra bonuses if they’re willing to pay.
This is a common strategy for software companies.
Premium Pricing
This is a pricing strategy that involves selling your products at a higher cost to convey the luxury value of the materials or goods.
It works best when you can prove the additional value in the item.
For instance, if you’re selling diamond earrings with certified diamonds, you’ll be much more likely to succeed with premium pricing than someone who just claims to offer diamond jewelry, but their prices indicate zirconia.
Market Penetration Pricing
This kind of pricing strategy involves entering the market at a much lower price than normal.
You might launch your business with a hefty discount to get people buying, then increase costs when you’ve gained a solid customer base.
You can avoid losing too much cash by offering gifts, shipping, or buy one get one free deal with your initial launch too.
Psychology Pricing
Psychology pricing involves choosing prices in a way that appeals to human psychology.
For instance, human beings are often inclined to see $14.89 as being much cheaper than $15 simply because they focus on the $14 rather than the .89 in the price.
Choose Pricing That Makes Sense to Your Business Structure
There’s no one-size-fits-all strategy to finding the perfect pricing strategy.
Some companies find that they get the best results when they launch with higher prices when demand for their product is high, then cut costs when the hype begins to dwindle.
Other companies like to use a similar price to their competitors, to demonstrate that they’re in the same league as well-known brands.
Notably, some pricing strategies work better for particular types of companies.
If you’re a company selling a specific service that uses the time of a professional rather than materials and supply chains, you can’t use a cost-plus pricing model.
Service providers are more likely to consider quote-based pricing, where they assess the time requirements and demands of the project, and deliver a price based on the client’s individual needs.
SaaS companies, on the other hand, are more likely to use subscription models and memberships to maintain their customers over long periods of time.
As a software company, your focus is on keeping customers around for the long haul. Discounts on annual subscriptions will often keep your customers from going to other providers.
Adapt and Learn Over Time
Finding the ideal pricing strategy can be complex, but don’t forget, you can always change your strategy at a later time.
As you learn more about your audience and their needs, you can upgrade your pricing strategy to suit the preferences of each segment.
