Carl Gould is a business transformation expert with 7 Stage Advisors. His methodologies are practiced in over 35 countries.
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Inflation has impacted almost every aspect of business in the past few years. From the cost of wholesale sourcing to hikes in resell rates, we're all struggling to find the right price for our products and services. The answer might seem to be to simply raise prices at the rate of inflation, but we all know that higher price tags can also drive off customers.
So what determines what your customers will pay? Which factors affect your ability to set pricing? And how can you balance that with what your company needs to stay profitable? Start by evaluating the influencers that impact your company's pricing strategies.
Competition
Competition might just be the number one pricing influencer. After all, if all your competitors undercut your prices, it can affect your margins. If they all increase prices, it's easier to raise yours as well.
Pricing is also affected by the amount of competition. For instance, if you're the only auto shop in an affluent neighborhood, you have flexibility on pricing. But if you're one of many, it's easy for customers to shop around.
Before you raise prices, remember to evaluate all of your competition, not just those with precisely the same business model. For example, plant nurseries must evaluate competitive pressure from landscape services, mail-order catalogs and big-box garden centers. Companies must consider the strategies of all possible competitors to create an effective pricing strategy.
Target Market
The needs of the existing or potential customer base significantly influence pricing. If your target market is well-heeled, you may be able to charge more. If they use a lot of your product, you may want to price it for volume consumption. Each business is different, and customers may not act and shop the same for all categories. So spend time getting to know your customers, think about their needs and evaluate their consideration process and values. Your findings can impact your pricing strategy.
Value
The role of value is a bit intertwined with the target market and competition influencers. Customers pay more for products or services that offer more value. That value may exist in the form of innovation, better quality, better service, speed, convenience or problem-solving. So if your firm excels in one of these areas, you may be able to factor that into your pricing strategy if it adds substantial value compared to the competition.
Let's look at pizza shops. In many areas, customers can choose from multiple pizza options. Some pizza shops utilize fast delivery to drive volume, but delivery doesn't improve margins. Other pizzerias use high-quality ingredients, exceptional crust or unusual combinations, especially when these options clearly set the company apart from the competition. That’s why you likely can find pizzas for $9.99 and $29.99 in your neighborhood. The $9.99 pizza may not be great, but your kids like it and the company delivers it quickly, so it’s a deal. The $29.99 pizza is a gourmet treat, but you need to order about an hour in advance and pick it up. These two business models have very different value propositions that allow them to work with different price points.
Costs
This is a straightforward consideration. How much money is needed to produce your product? What do you pay for raw materials? What's your payroll and overhead? How about distribution expenses? An organization's cost structure is the most fundamental element of pricing strategy. If you aren't priced right to cover your costs, you're out of business.
Scale
Scale is technically a subset of costs but is still a significant influencer. If you make your living on 10 sales per year, your margins will have to be substantial. If you make your living on 10 million sales per year, margins can be small. This is why a custom couture suit can cost $10,000 while designer suits off the rack go for $2,000 (or less). Scale is why large corporations beat startups on cost every time, so it's critical to consider what you need to accomplish at your current scale and weigh that against the scale of your competitors to set pricing.
Accurate Pricing Paves The Way To Success
Not all of these factors will have the same weight on your pricing decisions. But considering all the influencers is the first step to developing a profitable pricing strategy. When you evaluate the competition, target market, value, costs and scale, you can be in a much better position to develop a pricing strategy that makes sense to consumers and ultimately drives bigger profits for your business.
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