Are you a MAKER or a TAKER – Setting your price!
Calculate your costs
You’ll do a better job of setting your prices if you know how much the product or service costs you before you start. No matter what your pricing strategy is, at the end of the day, the selling price of your product or service should more than cover the associated costs, otherwise you won’t be in business for long.
Your pricing policy needs to factor in the variable costs of producing each additional unit and the fixed costs that are incurred regardless of the quantity produced.
Develop your marketing strategy
Work out the target market for your product or strategy. Clearly define who your customer is; their lifestyle, purchasing habits, companion products and services. The more granular you are in defining your market, the easier they are to find and approach, because you will know more about them.
Then think about your marketing mix, which is usually defined as the product, price, placement and promotion. Consider if you are positioning in a premium, high priced, singular purchase category or maybe considering multiple purchases at a lower price point? How and where will you sell it? How will your customers learn about it?
Having a great product or service is one thing but making your customer aware of its value is another.
Going through the processes of establishing the needs of your target market, determining your unique selling proposition (USP), and identifying the benefits of your products or services will help you to price your products and services and then work out how much budget you’re likely to need for marketing.
Estimate the demand
Demand is driven by tastes, income, the need, credibility of your brand and the availability of other products at similar or different prices and can be a major factor in your pricing. For example, if your product or service is more expensive than your competitors’ you may find your sales volume is lower if your target customer is price sensitive.
Having a fantastic product or service is one thing but making the customer aware of its value is another, so as mentioned above, having a great marketing strategy is vital.
You also need to consider factors such as seasonal changes to your costs or to customers’ willingness to purchase at different times of year. While you’re thinking about that, it’s worth considering whether your business and cash flow will be able to deal with varying levels of consumer demand.
Understand the competitive environment
Questions to ask yourself about your competitors and the market place you’re operating in include:
- What benefits does your product or service have that competitors don’t?
- Can you estimate your competitors’ cost structure? How does it compare to yours?
- What price points are already in the marketplace for your type of product?
- How will the value your product or service delivers differ to that already on the market? And how is this reflected in your price?
How much do I need to spend on marketing?
An age-old question! Some businesses work on a percentage of sales or turnover. You can search the internet and find all sorts of ratios, but KMT would suggest thinking deeper than a percentage – especially when you are starting out. You need to think about how valuable each customer is; are they likely to be a single purchase or have a larger lifetime value, what is the margin of this and how much profit do you want to make. In answering these questions, you will then be able to assess how much you are prepared to pay to acquire each new customer.
Here’s an example:
- Your business sells a monthly subscription for $10/month. Each customer usually subscribes for at least three years and your profit margin is 60%. Your customer lifetime value is:
- 12 months x $10 x 3 years = $360 revenue and $216 profit
- You want to make $50 per customer. Theoretically, you can spend $166 on your marketing to acquire each customer. In finalising your marketing budget, you will also need to consider how many customers cancel their subscription within the three year period and how many leads you need to convert one to a customer. It’s not an easy task and, as you grow your business, you will continue to refine your approach.
Play around with some alternatives
Once you’ve gathered all your pricing information, review some pricing alternatives by modelling a few different scenarios. Our KMT team can help you with your expense estimates and cash flow modelling.
Depending on your business, you may decide to use different pricing strategies for different products or groups of customers. It’s worthwhile reviewing the implications of each for your profitability, turnover and cash flow.
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