Being an entrepreneur can be very difficult in such a competitive market, and it becomes even harder when you have to decide on the best, most effective pricing strategies.Although most entrepreneurs choose to go the simple route and make their prices lower than their main competitor’s, it may not be the best for every business.
In fact, there are so many various pricing strategies to choose from that it can be hard to decide which one is the best for your business. This is especially true when you are just starting out on your business and don’t have the experience yet.
That’s why today we’ll look at the three most effective pricing strategies made for new entrepreneurs.
There’s no way to mention pricing strategies without talking about the most popular and misused one: competitive pricing.Although many small business owners, freelancers and entrepreneurs use the competitive pricing method to help set their prices, many are doing it wrongly.
In order to do it correctly, two conditions must be met.
First of all, you shouldn’t just take the prices of your main competitor. You should survey and take the average of the prices of all (or many of) your competitors. This will help give you the fair market value for your products or services.
Secondly, you need to determine whether your business cost structure is comparable to that of your competitors. More specifically, are your costs similar to or quite different from your competitors’? If they are similar, then you can set your prices a bit below theirs, and if your costs are lower, you can be much more competitive in your prices.
However, if your costs are higher than your competitors’ costs, then you can’t set your prices competitively without cutting into your profits.
Customer Perceived Value
This pricing strategy is based on using the perception of value that your potential customer has of your products or services. In order to calculate that value, you first have to determine what benefits, in monetary terms, your customer sees in your products or services and what costs your customers assumes.
The equation is:
Customer Perceived Value (CPV) = Total Perceived Benefits – Total Perceived Costs
Therefore, if your customer places a value of $50 worth of benefits on your products or services, and if the costs are $35, the CPV is $15. However, the lower the costs, the higher the CPV, and the more incentive a customer has to buy your products.
Therefore, you shouldn’t charge any less than what your costs are, but you also shouldn’t charge any more than the total perceived benefits. Therefore, your price range should be between $35 and $50.
The last pricing method is also quite common. Here, you are going to make your pricing determination based on your costs plus any satisfactory markup.In order to use this pricing strategy, you have to calculate all the costs associated with producing one unit of your goods or provide one hour of your services.
These costs include variable costs (such as materials, direct labor, etc.) and fixed costs (rent, utilities, fixed salary, etc.). When you have your costs, you then add a markup to come to the final price.
So let’s say, for example, you calculate your fixed and variable costs per unit to be $20. With a standard markup of 30%, your price should be $26.67.
While this pricing strategy is straightforward and guarantees you have a comfortable profit margin, it does have one drawback. It doesn’t take into account your competitors’ prices, and therefore you could be over- or undercharging on your goods or services.
These pricing strategies, in general, are good depending on what your products or services are and what industry your business is in. When you understand your costs, your product value proposition and your industry, you’ll be able to choose the best pricing strategy.
With that effective pricing strategy, you’ll be able to set competitive and profitable prices that will help you to boost your new business.
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