What are your customers willing to pay for your products and services? What is “the right price” that beats the competitors, but still leaves you with a profit margin? Answering those questions can be a real challenge for small business owners. Yet, finding that “right price” is one of the most important aspects of any business. On this blog, we will give you 5 simple tips on how to price products and services successfully.
Tip #1: Understand Competitive Pricing
Competitive pricing is a very common strategy among entrepreneurs. You look at how your competitors price products and services and charge slightly less for yours. Many customers will gravitate towards products that are cheaper. Be careful not to set your prices too low. Customers may suspect that there is something wrong with the product or that the service or product is of low quality.
The most important thing to remember, though, is:
This only works when your products or services are of comparable quality to your competitor’s. If the competitors offer better products and services, people are going to spend a little more for the better product or service. For an in-depth look at competitive pricing theory, check out this article.
Tip #2: Use Actual Shopper Data to Price Products and Services
You should be basing your prices off of concrete evidence on your sales trends. If something is not selling well, you may consider lowering the price. But, if something is your best seller, you can get away with charging a bit more for it. Basing your prices off of actual shopping trends gives you the best chance to set prices that will work for your customers.
Tip #3: Upsell Your Products
Upselling is a tactic that businesses use to get customers to spend a little extra when shopping. Examples of upselling include asking customers if they would like to “supersize” their meal, or having a buy-two-get-one-free deal. Good upsells will convince customers that they are benefitting the most from these deals. While in reality, you are the one coming away with a little extra revenue. Those extra revenues build up over time and can make a significant impact on your profit margins. Make sure you don’t overdo it to the point of annoying the customers.
For more information on how upselling works, especially when used by restaurants, take a peek at our article on upselling.
Tip #4: Understand Your Profit Margins
To effectively price products or services you have to have a solid understanding of what it costs you to make a product or provide a service. Your profit margin starts at the point where your sales outweigh your costs in providing the product or service. Knowing your profit margins will keep you from setting prices so low that you end up operating at a loss. For more information on how to calculate your profit margins, you can check out this simple guide.
Tip #5: Find A Good Anchor
Price anchoring is a technique that you can use to help customers make decisions in an easy way. The most common example of a price anchor is labeling a product a “best-seller” or “most popular product/service of the year”. This signals to the buyer that the product is your premier product, and they will likely become more interested in it.
If a customer faces many options and no way to differentiate between them, they may get overwhelmed and might not decide to buy anything at all. This is why it is important to try and differentiate your products when possible. One way to do it is, again, with price anchoring, this time creating a tier system for your prices. Think of getting a soda at a movie theater. They are usually offered in a small, medium, and large size. Most people equate medium as the most common (and more acceptable) option and will gravitate towards it more often. You can use this knowledge to set high tier prices that will push customers down to the middle tier. Making them less likely to buy a small or not buy anything at all. You can read more about price anchoring here.