Establishing the perfect prices for your products is not just a question of calculating costs and deciding on a mark-up. Formulate a pricing policy and think about sales channels and export prices.
When pricing your products or services, there are three basic methods which you can apply: cost-based pricing, value-based pricing or competition-based pricing.
However, in the modern, global market, it does not suffice to just look at the individual products; you must formulate a pricing policy which takes account of your various sales channels and your pricing in the export markets.
Cost-based pricing considers the total cost of producing a product or service, i.e. the price must cover both the fixed costs (e.g. rent) and the variable costs (e.g. materials) involved in producing the product or service.
Once the cost is known, you add a mark-up or profit – often a certain percentage.
The model is hard to use because it can be quite difficult to think of all the costs involved, because costs may change and because the model does not take account of your competitors' pricing of their products.
Some products and services are of higher value to customers than they cost to produce/provide. Cleaning services may be extremely valuable to a young family, while an exclusive watch may be very highly valued by a businessman. This model therefore helps you to set prices which are higher than the ones calculated using the cost-based model.
To find the right value, you must analyse all the advantages which your product or service offers to customers – advantages which are not offered by your competitors.
However, you must differentiate between your customers. They do not necessarily all derive the same advantages, and may thus not be willing to pay the same price. This is often the case with software licences for students vs businesses.
Very few businesses can fix a price for their products without looking at what their competitors do. If you choose this model, you should look at how similar your products are and how sensitive demand is likely to be to lower and higher prices.
However, you have to look at the big picture and your pricing policy as a whole and preferably make sure that you maximise your profit. Your prices must reflect the position of your business in the market. For example:
- Are you the only one in the market and do you want to maximize your profit?
- Are you a market leader but under pressure from competitors offering cheaper products?
- Do you need to penetrate a new market via low prices?
E-trading has thrown up a host of new challenges as regards the pricing of products and services. Most businesses have a presence on the Internet and a webshop. But how do manufacturers handle their network of suppliers without encroaching on their business, while at the same time getting a share of the e-trading business?
One successful model has been coordinating the dealer network so that orders will be executed by local dealers, based on postcodes.
As a modern business, you must consider the price of a product in a given sales channel (shop, webshop etc.), but also coordinate your product pricing for the various sales channels.
Export prices are rarely the same as prices in the Danish market. As a business owner, you must look at local costs, competition and demand, but also factor in logistics, customs duties and the general level of the local economy. The pricing exercise is further complicated by having to consider foreign exchange rates, statutory product requirements, logistics etc.
Many Danish products enjoy a high status in the export markets. Consequently, a very low price may hamper sales because it is not congruent with the level of status.
Price is not everything
The market for many consumer products has never been as transparent as it is today thanks to online services such as pricerunner.dk (in Danish), which provides consumers with up-to-date information on the lowest price of a given product.
If you are selling a standard product, you cannot differentiate on price alone; you have to think about service, support, branding and, not least, creating a community around your business.
- Calculate the cost of the product and add your mark-up.
- Find out what your competitors charge for their products.
- Establish the value which your product brings to customers – perhaps by asking them directly.
- Decide on the right price, depending on your business strategy.