One of the most important questions that a business owner can ask is, what should we be charging for our products and services?
On one hand, charging too much discourages customers from purchasing your product. On the other hand, charging too little reduces your profit margins. It would make sense to find a happy medium, but in the entrepreneurial world, the solution to this question isn’t that simple.
First, what is the price?
In the simplest terms, price is the amount of money that is given in exchange for a good or service. The customer buys a product from a business and exchanges an amount of money that they deem equivalent to that good or service. Needless to say, the customer won’t buy a product that they don’t believe is worth the amount that they’re paying for it. Depending on the customer, the product that you’re selling might be worth more or less from their perspective than the price at which it is offered.
As an entrepreneur and business owner, it’s important to remember that, quite frankly, your customers don’t care about your business costs. When a customer sees a price increase, they won’t immediately assume that it is because the costs of manufacturing or distribution went up. The customer only sees more money leaving their pocket!
Here are five important tips that will help you determine what you should be charging for your products and services!
1. Research Your Market
Explore the prices of comparable products and services on the market. This is what your customers will be looking at when they plan to buy. Thanks to the internet, price shopping is easier today than it has ever been. In fact, a customer can go online and compare your price with that of other companies in a matter of clicks.
This is where you need to make your product stand out and find a way to differentiate what you’re selling from the rest of the businesses in that specific market to put a larger value on your product.
2. Consider the Perceived Value of Your Products and Services
Are there certain aspects of your product or service that customers consider valuable? Are you charging for them? Can you package items together to increase the perceived value of the overall product or service? Can you separate bundled products to sell separately?
These are the questions that you should be asking in order to strike the right price for your products and services and maximize the profits from your sales.
3. Study Customer Responses
Depending on the product and your target demographic, a price change not only affects the number of new customers you see but also your customer retention rate.
When you increase prices, it’s almost guaranteed that you will lose a few customers. Suppose that that fraction of your customer base was to leave after the price increase. Would the increase in profits allow you to continue serving all of the other customers who stayed?
It’s entirely possible that your profits would increase in such a way that you would be able to provide even better service to your best customers.
4. Increase Your Prices Incrementally
If you find that you do need to increase your price, do so at a smaller percentage each year rather than with one massive increase. Raising your prices may be necessary for a number of reasons, but by raising the cost of your product by just a few percent every year, you can improve customer retention.
This comes back to price shopping. By raising your price more frequently at a lower percentage, you make it more difficult for customers to price shop and find a product that holds the same value at a significantly lower cost; yet you’ll still enjoy a profit increase.
5. Never Stop Innovating
There is one caveat with all of these tips—they won’t work if your product is a commodity. Price can be elastic, but when it’s difficult to differentiate your business from any other business in the market.
Keep setting yourself apart from your competitors. By constantly improving your products and services, adding to them, and differentiating them from everything else on the market, you’ll be able to increase your prices and retain more customers!