The Extended Marketing Mix by Booms & Bitner, which was an improvement on McCarthy’s 1960 foundation model on marketing, details the 7 P’s of Marketing as Price, Place, Product, Promotion as well as Process, People and Physical Evidence.
Let us talk about pricing… Many business owners go through some really tough times trying to fix a price to their products or services. Some of the time, they observe the market rates to fix a price. But then, as basic as this is, it isn’t always as cut and dried as that. Several other factors affect what price we should fix for our products and services. Here are some of the best-kept secrets on setting a price which the most successful entrepreneurs have practiced and helps them stay winning.
Never Engage in a Price War!
Before we begin with the secrets, we should start with what you should not do. When faced with the task of fixing a price, the laziest way most entrepreneurs take is to engage in a price war. This should not be you. You are smarter than that! Price wars will necessarily help you increase market share, yet they could create false customer expectations, divert attention from the true benefits of your products and service and could lead to ‘retaliation’ by competitors. In the end, everyone is in a race to rock bottom and no one wins.
But more than that, the lower your prices go, the more you risk customers perceiving your products or services as inferior, with a low cost as the only offered value. Avoid price wars as much as you honestly can.
Know Your Customers
When you set your prices for your products or services, it helps to understand that you do not exist in isolation. You aren’t going to buy your products and services by yourself. So make some genuine efforts to understand your customers through market research. How much would they or do they already pay for similar products? What’s their income bracket? Are they concerned about budget, about convenience or about status? Do not fix a price in isolation. If you fix outside what your potential customers are willing and able to pay, you would end up the loser and even causing near-irreparable damage to your brand.
Know Your Cost
Another important thing to understand is what it cost for a product to get from production to eventual delivery to the customer. Calculate your overhead and/or your variable costs. Factor in every single cost of the entire process involved. Your eventual selling price must cover these costs- at the very least, and still make you a decent enough profit, at the end of the day.
Know Your Competition
Study your competition like your life depends on it, because indeed, the life of your business does. Do not just study what price they sell their products, also study what value they offer. Or you would be left wondering why everyone buys happily from the other guy who sells at double your price, yet complain and constantly negotiate when they have to patronize you.
Know About Choices
It is often a bad idea to have just one product type with a fixed price. Customers usually want to feel they have a choice. Tweak your products and services such that similar products have a range of prices whose difference is in their value-offering. That way, a similar product may command a higher price if the warranty period is different, as is the speed of delivery, value-added services, attached products or gifts et cetera.
Know Your Financial Target
Finally, know your financial target. If you hope to make a certain amount at the end of your financial year, you would do well to understand that you would hit that target only with a right balance of volume and cost. How many products do you want to make within the given period? Now, multiply that with the price you have fixed. If they do not add up, go back to the drawing table. That target would guide you in fixing prices.
As Associate Professor of Management Science, Charles Toftoy of George Washington University says, this is probably one of the toughest P’s to get figured out. But it is also one of the most rewarding if you get it right!