How To Set An Effective Pricing Strategy For Your Business
![Emma Bowdler | The Women's Accountant Emma Bowdler | The Women's Accountant](https://thewomensaccountant.com.au/wp-content/uploads/2022/06/The_Womens_Accountant-Emma_Bowdler.jpg)
Emma Bowdler
I’m a cheerleader for women and an accountant bursting with personality.
Many a business owner has torn their hair out over pricing. How much to charge? Will people pay that? Am I going to be competitive and still make a profit? In this capitalist world, this one simple number that represents the amount of money required to obtain your goods or service can cause so much anxiety and put literal lines on our faces.
But here’s what most people never tell you about pricing: you don’t set the price, the market does – and whether that price is deemed to be ‘worth it’ is a decision made purely in the minds of your customers. Crazy, huh! That’s why the process of weighing up the perceived value, usefulness, quality, sustainability, and a whole host of other factors, when it comes to designing your pricing strategy is far more nuanced and important than it might seem at first glance. So, what are the things to consider and what’s the right path for you and your business?
What Is A Pricing Strategy?
Your pricing strategy is an articulation or reasoning behind the price of your goods or services; a method used to determine the best possible price point for your ideal customers. Too high and you might not make any sales, too low and you might not make any profits. A pricing strategy that enables you to maximise profits and minimise risk, all whilst aligning with your business goals and objectives, is what we should be striving for as smart and savvy business owners.
“The market is like Goldilocks. It decides if your price is too hot, too cold, or just right.”
– Peter Porcelli
What Do I Need To Consider?
When you are building the business of your dreams, the strategy behind your pricing needs to take into consideration what your costs are, what others are charging for similar products/services, what you’re trying to achieve with your business, and how you want your brand to be positioned in the market (i.e. budget-friendly to prestige pricing). We see a lot of small business owners setting a price by assessing their costs, looking at their competitors pricing and then settling somewhere in the middle. While both factors are very important, this method of price setting neglects one of the most critical components of doing business, your customers, and their needs!
There are more than a few options to consider, so let’s unpack how some of these strategies work so you can try them on for size!
But First, Why Is It So
Important That The Price Is Right?
Remember us letting you in on the secret that pricing is in the eyes of the customer? What that basically means is that they are the ones to make a decision about whether or not to buy your goods or services by weighing up its value, both actual and perceived. Therefore, it’s your job to identify and communicate that value and how it solves a problem for them, without making too many costly mistakes along the way. As Katharine Paine says:
“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.”
– Katharine Paine
When it comes to pricing strategy there’s no one size fits all, and it’s important to remember that no one strategy is inherently better than another. On top of that, many of the different strategies to choose from are not mutually exclusive, so you might even employ several at a time or develop a hybrid strategy for different products, services, or verticals.
“It can help to think of your pricing kind of like a game of chess; one strategy on its own is probably not likely to win you the game.”
– Emma Bowdler
Different Types Of Pricing Strategies
Remember how we said there were a heap of choices? Well, we’ve gone ahead and sorted them into four well-known groups, because we’re helpful like that! Starting with marketplace strategies; then Software as a Service (SaaS) strategies; competition strategies; and finally; service-based strategies, let’s unpack some of their key strategic differences and the types of strategies that fall underneath them:
Marketplace Strategies
Largely based on supply and demand and consisting of strategies like ‘charm pricing’, ‘dynamic pricing’ and ‘premium pricing’.
SaaS Strategies
Derived from companies that deliver ‘Software as a Service’ (SaaS) like Spotify or Xero and covering well-known tactics like ‘freemium pricing’ and ‘price anchoring’.
Competition-Based Strategies
Heavily based on your ‘competitors’ and their actions with tactics like ‘predatory pricing’, which is as awful as it sounds.
Service-Based Strategies
Common, but not exclusive, to the service industry.
“Price is what you pay, value is what you get!” – Warren BuffettREAD: Supercharge Your Marketing With These Five Simple Principles
So, Which One Should I Choose For My Business?
While most of these strategies are not mutually exclusive, some work better together than others, and some work better for certain industries. It is perfectly normal (and even encouraged!) to borrow tactics from all four categories, and there are certainly no rules against changing strategies if things aren’t working. In fact, that’s what being nimble and agile in business are all about!
Here Are Four Tips For Setting An Effective Pricing Strategy:
- Know Your Costs – how much does it cost to run your business? What about each individual product or service? Are there costs, other than financial, to doing business – such as environmental, energetic, or ethical? Consider the entire value chain. And don’t forget to factor in those taxes!
- Put Yourself In Your Ideal Customer’s Shoes – whether they’re Louboutin’s, Vans or Crocs (hopefully not) – take the time to understand what your product or service is worth to your customers, and how much they are willing to pay for it. Customer journey mapping and qualitative research are great ways to do this. Go deep on figuring out why people buy from you. Hot tip: there are the ‘good’ reasons (better for the planet) and there are the real reasons (you’re on the shelf in front of my face). Try and find out what those reasons are in a way that’s cheap and quick to test.
- Get The Basics Right – without knowing what levers you need to pull to fatten up the bottom line, you will struggle to make consistent profits and we don’t want that! What are those levers? In a nutshell: leads, conversion and retention – and you should probably have a strategy for each. How are you going to generate leads? How and at what rate are those leads converting? And are those customers or clients coming back? Data is #queen here, so if you are not tracking these metrics, start today.
- Know Where You Stand In The Market – finding out information about your competitors, or others in the market, will allow you to best position yourself and stand out for all the right reasons. Even something as simple as bringing a ‘Buy Now, Pay Later’ or BNPL service into your business could give you a competitive advantage. If others are overlooking something, it could become your niche, or there might be a reason. We suggest finding out! Remember, this is not about crushing your competition or becoming the Monopoly (Wo)man, it’s about seeing where the holes are in the market and filling them with your wonderful self.
So, there you have it – a crash course in pricing strategy and four steps to help you get started with one. Remember: getting the price right is all about balancing value + market conditions + cost, then you’ll be ready to… COME ON DOWN!
If you’d like some help to refine your pricing strategy or even to build one from the beginning, you know we can help you do that, right?
Switching Accountants: Why It’s Easier Than You Think
Switching Accountants: Why It’s Easier Than You Think Switching accountants doesn’t have to be hard! Discover the easy steps to find a values-aligned accountant who truly supports your business growth. Emma BowdlerI’m a cheerleader for women and an accountant bursting...
Five Business Mantras We Live By (And You Can Steal!)
Five Business Mantras We Live By (And You Can Steal!) Discover five business mantras that guide us to make strategic and value-aligned decisions. Plus some handy tips on how to adopt them in your business. Emma BowdlerI’m a cheerleader for women and an accountant...
Automate, Delegate, Rejuvenate – Systems and Processes Every Business Needs
Automate, Delegate, Rejuvenate: Systems and Processes Every Business Needs Emma BowdlerI’m a cheerleader for women and an accountant bursting with personality. Close your eyes (ok, well not *literally* because you need to keep reading), and picture: an entrepreneur....