Letโs look at how you can find the right price for your products and services.
Identify your business goals
Before you can determine your pricing, you need to know what you want to achieve with your business. This is where you consider the big picture and set long-term goals aligned with the current stage of your business.
At this point, you should develop or consult your business strategy. Your pricing strategy needs to be woven into your business’s identity. Consider these questions when looking at prices:
- Your business goals: Looking to grow your business, winding down, or positioning for sale?
- Current stage of your business: Are you starting up, scaling or maintaining?
- Brand identity: How will your prices reflect you as a business?
Clarifying what you want to achieve will help you determine what to charge.
Researching your industry, customers, and market
Your business goals need to align with the industry you operate in, your competitors, your customers, and the overall market.
Industry & competitors
Your industry and competitors are factors that determine your price. You need to research the typical price ranges in your industry and how your business fits within them. See what your competitors are charging: how do they justify their price? Is it through quality, service, or their brand recognition?
Here, you can find opportunities to leverage in your favour. For instance, consider a lawn mowing business breaking into another area. The business has identified that other competitors donโt offer landscaping services as part of their packages. The business opens a new location and offers this service to set itself apart and attract customers through its competitive edge.
Customers
Analysing your customers and their behaviours is incredibly important to get right. You need to find:
- What your customers are willing to pay for your product or service.
- How your pricing will reflect the value your customers perceive.
- Are your prices competitive enough to attract customers or alienate them?
To find these answers, go directly to the source. Whether you run an established or growing business, using customer feedback can help you evaluate your pricing. You can also develop customer profiles and personas to identify your ideal customer.
Market conditions
Market conditions influence your customers’ buying decisions. Whatโs the current state of the economyโis money tight, or do people have cash to throw around? If your business is seasonal, you need to consider how you adapt during slower periods and be flexible with pricing.
Another factor to consider is how resilient your business is to changes in market conditions. Mitigating risks through a flexible pricing strategy can help weather downturns. For example, our lawn mowing business offers tiered packages to suit different price points and customer needs. The lower package targets customers who canโt afford the business’s top service. The business captures these customers, improving cash flow while maintaining profitability through its other offerings.
Financial position
Given your business goals and industry, you should now have a sense of the price range you can charge. The next step is to cover your financial position. Start with your cost of goods sold (COGS). Once you have your COGS, identify the indirect costs your business incurs through operational expenses (OpEx). With these figures, youโll have a baseline and the flexibility to adjust the prices you setโyour wiggle room.
Example
Our lawn mowing business is looking to reevaluate its prices and increase profit margins. These are their findings on how much it costs per job:
COGS: $15-$20 (based on fuel, equipment, and consumables)
OpEx: $10-15 (Indirect costs associated with insurance, marketing, admin and vehicle expenses spread across 80 jobs per month)
Labour: $45-$60 (1.5-2 hours at $30/hr)
Total: $70-$95 per job
With this information, the lawn mowing business uses a cost-plus pricing model and adds $50 to each job’s cost. This leaves them with a price of $120, yielding a profit margin of approximately 20%-40%.
Adopting a pricing model
Youโll find this sort of pricing model used in trades, but it isnโt the only way to set your prices. Other models include:
- Value-based Pricing: Price is based on the perceived value to the customer. Quality and convenience add another dimension, allowing you to charge more than just covering costs.
- Competitive Pricing: Your prices are in line with your competitors. This applies to highly competitive industries, and the going rate determines pricing.
- Tiered pricing: Different service packages are offered at various price points. This uses a good > better > best pricing strategy to cover your costs with your basic package and increase margins with other services.
- Dynamic pricing: Prices adjust based on the season and demand. You charge a premium during peak periods and discount during off periods.
Pricing models help you set your prices, but you donโt need to settle on a single model to charge your customers. Using concepts from different models can help you charge based on your goals, industry, and finances to maximise profit.
An example of this is airline carriers. Travelling is heavily influenced by factors such as seasonality and competitor pricing. To set prices, airlines will use a combination of the pricing models above, offering tiered and value-based pricing for business and first-class tickets and competitive pricing for economy. Regardless of the package customers choose, pricing will be dynamic and reflect the season.
Setting your prices for your products and services
Deciding what to charge your customers is important; you canโt just set prices and expect them to pay. Your pricing needs to reflect your goals, customers, competitors, and operations. By considering these factors, you can come up with the right price to charge and find opportunities to maximise profit while running a stable business.
