Setting the right price point is key to running a profitable business

We have seen profound changes in customer behaviour as challenges such as the pandemic have eroded business and consumer confidence and income.

Supply chain disruptions, exchange rate volatility, and a robust and coherent approach to setting price points for your products and services is key to being sustainable and remaining profitable.

It’s a delicate balance between offering an attractive customer proposition and optimising the margins you make on the products and services you provide. There is no universal formula, given that customer price sensitivity and the volatility of input costs range across different industries and markets.

Companies should consider some principles that can help them set the right price.

Find the right pricing strategy and architecture for your business

There are numerous methodologies you can use to set the prices for the products and services you sell. Many businesses take the easy way out by simply adding a markup to their costs and changing the price each time their expenses increase. This isn’t always the optimal approach as it means you are continuously reacting to external events that highlight your costs to the customer rather than your value.

Just a few of the other common approaches include:

• Competitive pricing – Tracking what your competitors charge in as near to real-time as possible and adjusting pricing in response.
• Loss leader pricing – Using some aggressively priced products to attract customers and entice them to buy higher-margin products.
• Value-based pricing – Setting prices primarily based on the customer’s perceived value of a product or service.
• Premium pricing – Selling premium products and services to customers that want quality and exclusive goods.
• Price skimming – inflating the price of goods or services at the time of launch and then lowering them as market penetration increases. This is great when you have a product that early adopters will buy at a premium.
• Penetration pricing – Offering new products at lower prices to gain market share, then ramping up costs as adoption rises.

As these examples show, there is more to price-setting than adding a profit margin. It can be a strategic tool to drive customer growth and retention and increase profits over time.

Understand customer personas

 Understanding your customers and their wants and needs is key to setting the correct price levels. It can be helpful to segment them or create personas. Think about each potential customer’s motivations and requirements. For example, a clothing store might want to adopt different product and pricing strategies to address young parents trying to make ends meet compared to those targeted at high-earning, single professionals. This will help tier your pricing and product offering in a coherent way for different demographics.

Bundling is a powerful strategy in many industries

Bundling has become a science in various industries, for example, the fast-food industry and their Happy Meals or Streetwise deals. Putting together an offering helps customers choose faster and create a perception they are getting real value for money. To get it right, you need to offer complementary products people would usually want to buy together.

Continuously measure and report

Pricing is dynamic, which means the most successful businesses continuously assess whether they are meeting their strategic objectives. Some of the possible questions to ask include:

• Do we make more money when we sell slightly lower volumes at higher prices?
• Are we giving away things for which we could be charging?
• What is our customers’ tolerance for higher pricing?

Your accounting system can help you generate budgets and forecasts that will give you the insights you need to make the right decisions. Remember, even small changes can make a huge difference. A company selling sauces and chips could, for instance, become more profitable simply by charging for the sauces rather than giving them away.

Path to profitability

Treating pricing as a strategic priority can set your business up for long-term success. Getting it wrong means you’ll constantly struggle to regain lost market share or income because you priced an offering too high or too low. Mastering the science of setting the right price points for your products and services will help you grow your business, maintain a healthy cash flow, and drive profitability.