How To do Product Pricing For Your Small Business

 

This article shows you how to do product pricing for  your small business:

  • Know Your Market
  • Cost-plus method
  • Markup method
  • Value-based method
  • Price discrimination method
  • Late payment method
  • Average Price method
  • Price skimming method
  • Market penetration Method
  • Economy method
  • Premium pricing method
  • Bundled pricing method
  • Promotional Pricing method
  • Captive pricing method

Product pricing has and will continue to be a source of worry for both big and small businesses.

This is because, firstly, when you price your products too high customers will stop buying and move to your competitors.

Secondly, when you price your products too low, customers may assume that your products are of low quality.

Thirdly, if you do not set your prices at optimum levels, you risk running your business at a loss.

Most importantly, do not forget that the concept of price is nothing but an estimate of what customers are willing and able to pay.

There are many product pricing methods companies use to fix the prices for their products.

However, this article is focusing on the more commonly used product pricing methods.

Therefore, it is hoped that the following product pricing methods will meet the needs of your business.

Know the market

When considering which  product pricing methods to use in your small business, you need to know your market thoroughly.

This is necessary because you may not be the only person selling those or similar products in the marketplace.

Therefore, when pricing your products, you should find out how much competitors are charging.

Beyond that, you should find out how customers are responding to the prices competitors have set for their products.

After that, you should then decide whether to follow the ruling market prices or set your prices a little higher or lower.

Product Pricing Method: Cost-plus

Cost-plus is a popular product pricing method that you  can use in your small business.. By this method, you should simply add a certain percentage to the cost of each product.

For example, if a product cost you say N100, you could just add N30 as your profit margin. The profit margin should take care of the costs of running  your business.

This simple method is very popular with some manufacturers. It also works for small businesses.

Product pricing Method: Markup method

Markup method of pricing products is yet another simple method you can use to fix the prices of your products.

By this method, after you have ascertained the unit costs of your products, you simply add say 35% as your profit margin.

Thereafter, you should operating costs from the profit margin to arrive at your net profits.

Product Pricing Method: Value-Based Method

Yet another product pricing method you can use in your small business is the value-based method.

In this method, the price you set is based on your estimate of the value customers attach to your products or brand.

Consequently, your assessment could be in terms of product quality, reliability and other benefits customers enjoy by buying your products.

As this is more or less a trial and error method, you should ensure that your estimate is reasonably close to what the customers would expect.

In order words, if you estimate rightly it might work for you. On the other hand, if you estimate wrongly, you may not get the desired results.

However, the of using this method is that you might be able to make quick profits before competitors move in to share in your harvest of profits.

Product Pricing Method: Price Discrimination

Still another product pricing strategy that you can use the price discrimination method.

Price discrimination method simply means selling your products to different customers at different prices in different markets.

However, for this method to work for you, you should ensure that the markets you are selling to are far from each other.

Do not forget that if the markets are close to each other, customers will detect it. And if they do, they will abandon you and take their business elsewhere.

Therefore, to succeed with this method you also need to be smart.

Pricing method Method: Late payments

When doing product pricing in your business, you could consider the late payment method.

By this method, you will be asking your customers to pay a little more for your products to compensate for the extended time you will give them to pay you.

This is also a trial and error method. Customers who have not cash flow issues may not like this method.

On the other hand, customers who are having sleepless nights due to cash flow problems might jump at the offer.

Most importantly, the obvious downside of this method is that as soon as customers survive their cash flow problems, they will leave you.

Product Pricing Method: Average Price Method

Another product pricing method you can use in your business is the average price method.

For example, if a carton of milk containing 100 cans of milk cost N20,000, you should add N500 on top; making it N20500.

Next you should divide N20500 by 100 cans. Therefore, the  retail price of a can of milk should be N205 each.

The advantage of using this method is that it should help you to make:

  • High stock turnover
  • More sales
  • Little but rapid profits
  • Your existing customers to stay with you.
  • You able to attract new ones.

Our brothers in Onitsha in South Eastern part of Nigeria know and use this method a lot. It works very well for them. This is one of the secrets of their success in business.

Product Pricing Method: Price skimming

Another strategy you can use when doing product pricing in your business is the price skimming method.

By this method, initially you set the prices of your products high. As the needs of the first customers are satisfied, over time, you begin to lower the prices of your products to attract price sensitive customers.

Failing to do that will attract competitors to enter the market with the same or similar products that serve the same purpose. This could lead to price war.

Consequently, some of your competitors might even under-cut your prices, thereby putting you in a tight corner.

Although price skimming is mainly used by big firms to launch new products, it can also work for you.

However, if you can develop a unique brand or import products that are not in the market, you can safely implement price skimming.

The advantage of price skimming is that you might be able to make quick profits before competitors move into the market.

Product Pricing Method: Market penetration

Market penetration product pricing method is another strategy you can use when you want to do product pricing in your business.

By this method, you set low prices initially for your products to attract customers to buy from you.

But as soon as you notice that there are no price objections, you can begin to increase your product prices little by little over time.

However, when you notice that there are no price objections, you should begin to increase your prices little by little over time.

This method requires that, firstly, you need to keep your eyes on price movements in the market.

Secondly, you should watch if a big competitor with vast resources is planning to enter the market so that you can prepare your mind for competition.

The down side of this method is that you could suffer losses at the beginning, if the method is not well implemented.

Over time, however, the increase in awareness can drive profits and help your business to stand out from the crowd.

Price Set By Price Setters

In some markets, price setters in the market determine the prices for certain products. In other words, you become a price taker. You have no control over prices.

You simply have to follow the ruling market prices; otherwise you could be kicked out of business.

Product Pricing Method: Economy Pricing 

This pricing strategy involves reducing as much as possible your costs of production and marketing.

For example, if you are able to produce large qualities at low costs per unit, should be able to fix low prices for your products.

The aim is of this pricing method is usually to get new customers into your customer base.

If you are able to get more customers because your prices are reasonable, you should be able to rake in more sales and profits.

Product Pricing:  Premium method

Premium pricing is one of the methods you can also use to do product pricing. This method is mainly used by big companies to launch new product.

However, you too can use in doing product pricing if and only if you can develop a unique product/brand or import a product that is not in the market before.

With premium pricing, you can set high prices if you have unique products which your competitors do not have.

You could safely use this method if you have competitive edge over your competitors that sell the same or similar products that serve the same purpose.

In order to succeed with this product pricing method, you need to ensure that you:

  • Provide high quality products customers can hardly find anywhere
  • Support the high quality with excellent customer service
  • You work very hard and continually monitor and updating your products.
  • Package the products attractively so they are easy to handle
  • The interior and exterior décor of your shop are of very high standards.

Product pricing Method: Bundle Method

Yet another strategy you can use when you want to do product pricing in your business is the Bundle pricing method.

In this method, you group certain similar products that have similar cost curves and attach a price for all the products in the basket.

Thereafter, you can sell the products at one single price. Thus, you make the customers to pay less than they would if they were to buy the products one by one.

You may choose to implement this strategy at the end of a product’s life cycle, especially if the product is slow selling.

The advantage of this product pricing method is that:

  • It could help you to get rid of slow moving items in your shop.
  • Customers will feel that they are getting value for their money.

Therefore, the profit leaders in the bundle will compensate for the loss leaders in the bundle. At the end of the day prices level up. And you are better for it.

Product Pricing Method: Promotional Method

When you want to do product pricing in your business, you should sometimes try promotional pricing method.

Promotional pricing involves offering discounts on particular products. For instance, you can provide your customers with vouchers or coupons that entitle them to a certain percentage off the selling prices of the products.

Furthermore, you could also introduce “Buy One Get One” campaign. Customers like this type of offer.

Promotional pricing campaigns can be run on short term basis. In other words, they should not be on for too long; otherwise you could suffer some financial loses.

Most importantly, you can also use promotional pricing method to give incentives to customers by telling them to buy now before it is too late. This pricing strategy works fine for some businesses.

Product Pricing: Captive Method

Captive pricing is another method you can use when you need to do product pricing in your business. For example, when network telecom providers sell data to you, you must continue to buy data as long as you use their network.

You are, effectively held captive until you decide not to use the network again.

Therefore, if you have products that customers will continually renew or update, you should consider using captive pricing method.

In conclusion, the above list of product pricing methods may seem intimidating. Therefore, you should choose the pricing method(s) that best meet the needs of your business.

Related: How The 7ps Of Marketing Mix Can Improve Sales In Your Small Business

 

Samuel Ijenhi

CEO of Ijenhi Business Solutions

samuelijenhi@gmail.com

 

 

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