Pricing a product is all about making the most profit in the most sustainable way. It can be considered an art form, and while we wish for the days of $2 coffees again we know our coffee shops wouldn’t be making a profit if they did that.
Pricing products accurately is all about the strategies and tools we use. Many of us know if we end our prices in a 9 or 5 it increases sales, but that is not the only strategy you should employ. A pricing strategy should be data-driven and attuned to your market – some of this you can find within an Acumen POS System.
This guide will provide you with some key tips to create an effective pricing strategy.
1. Know your market
Pricing a product is not something you do on a ‘feels right’ basis. It’s usually based around how established your products are, the demand for your products and what the market looks like. Key questions to ask are:
- What life cycle stage is the market in?
- What life cycle stage is your business in?
- Do you have direct competitors and who are they?
Understanding where you are in the market and who you are in direct competition with can help you understand the value of your products. For example, if you are in the infancy stage of your business and your customer base is in the growth stage, best practice is to have an introductory offer that is slightly lower than the market average to attract customers.
2. Know your customer base
Your products are unique to your customer base, so it is just as important as knowing your market to identify who your ideal customer is. Consider:
- What do they look like
- Their demographic: Age, Gender, Place they live
- What is their occupation
- How many kids do they have
- Hobbies and how much free time they have
Understanding who your ideal customer is will help you price your products accurately because you understand what they are willing to spend and how they will spend it. Another benefit to knowing your customer base is that you will be able to identify trends that will help you sell your product. For instance, if you are a hardware store, consider a Father’s Day sale or campaign.
3. Choose the best pricing technique
There are many pricing strategies to choose from but it depends on your business model as to which one is right for you. Here are a few of the best pricing techniques you can consider:
Cost-Based Pricing: A simple pricing strategy that can help ensure you make a profit with each product sold. In this strategy, you add the cost of the product to a fixed percentage markup that you would need to make a profit (i.e. 15%). Usually, this is a pretty similar markup across your industry and is generally suited to businesses who move large quantities of products.
Market-Oriented Pricing: Competition-based pricing considers your costs, the quality of your product and your customer. This pricing strategy is great for new businesses entering an established market as you can determine if your product is of higher quality and if your customers are willing to pay a higher fee for a higher quality product.
Dynamic Pricing: This is a time-based pricing strategy which allows businesses to set flexible prices based on current market demand. This means you can change the price multiple times over a set period of time so that you do not miss valuable customers.
Manufacturer Suggested Retail: This is the suggested price wholesalers or manufacturers recommend you sell their products. This pricing strategy saves you time but will mean you have the same prices as your competitors and may not maximise on your profit.
4. Work out the costs
Now that you have evaluated your industry, customer and pricing strategies. You need to work out what costs you have. Understanding your costs will ensure that you choose and develop the best pricing strategy for your business. There are a quite a few costs involved in running a business consider:
- What are your overhead costs?
- What monthly and yearly fixed costs do you have?
- What variable costs are there?
- Taxes and government rebates
It’s important you don’t forget about the costs involved because they can severely impact your profit margin and the success of your business. With Acumen POS, you can pull up reports on your overhead costs to help visualise what price your products should be.
5. Create a strategy to drive long term business profit
It’s important that your pricing strategy considers what you need to make to be profitable in the long run, how much demand there is and what volumes of products you need to sell. One of the ways you can do this is by analysing your current stock and profit margins to measure price elasticity. Price elasticity is the relationship between quantity sold and the price sold at, and it demonstrates that often the highest price will not get you the most profit. This is because the most reasonable price will have the highest conversion rate. A good way to visualise this is to consider you have 100 customers and how many of them would buy your product at each price point.
6. Market changes
Finally, it is important to remember that the market changes and your customer’s behaviour will change. Therefore it is important to make sure your prices don’t remain stagnant. Experiment with your prices and see what works best for your customer base, but make sure all of your changes are data-driven and can produce reliable outcomes. A good practice is to change your prices as the market changes.
Pricing with Acumen POS
Now that you have developed your pricing strategy it’s time to implement it. Luckily for you, if you have an Acumen POS system it is relatively easy to execute. Here’s a few ways you can do it:
- Change prices of individual products – this technique is the simplest but also the slowest
- Update a range with a percentage increase – faster and less prone to human errors as you are leaving it to your POS system
- Update cost pricing with a margin increase
- Import a set of cost prices from a supplier which is relatively painless and time-saving.
If you are introducing or refining a pricing strategy to your business make sure you are using Acumen POS. Our POS system is one of the most comprehensive systems on the market and can help you with a range of business activities. Our team will not only help you set it up but will provide support for any queries or concerns you may have when using your POS.