Dear M & M: I am having trouble coming up with a pricing strategy. Do you have any ideas on what I need to do to set prices? -Bill
The first thing that needs to be done is to know for certain what your products and services cost. The next step would be to figure what are your other expenses not related to the cost of your goods or products or services you are selling are. There are many other considerations like competing products or services as well as other business competing in your marketplace selling similar goods or services.
One must know your break-even point. Break-even is the point where total sales revenue equals total expenses. Then you need to determine what your pricing philosophy is. Are you selling to get more traffic in your place of business? Do you want to keep your prices high to maintain higher margins? Generally as prices rise demand falls.
What is that sweet spot that I can set my prices to generate the most income? Listed are some pricing strategies one could implement. Mark-up pricing is based off a percentage mark-up based off products costs. For example if an item costs $6.00 and is sold for $10.00 the mark-up of $4.00 represents a 40 percent mark-up of the selling price ($4.00/$10.00 X 100 = 40 percent) or a 66 2/3 percent mark-up of costs ($4.00/$6.00 X 100 = 66 2/3).
Penetration pricing is selling below current market pricing to get more people to buy to gain rapid market share or increase current market share. Skimming pricing is setting prices higher to target early adapters ready and willing to buy at the higher price because they want to be the first people to have it and price doesn’t matter. Follow-the –Leader pricing is exactly what you think.
Picking the competitor with largest market share and following the price they set engages your company in Follow-the-Leader pricing. Adaptive pricing is a strategy used that places the value on a product based on various needs of different customers. Remember if a pricing strategy is not working making the necessary adjustment to keep selling.