Pricing

Who are your competitors, and what do they offer?

What are the key features and benefits of their products?

Which products are the most successful? Do different market segments buy different products?

What are the key criteria customers base their decisions on? Which criteria justify higher prices for different products? How do prices vary?

The core product itself. For example, a car.

Additional product components.

For example, number plates and the owner�s manual.

Customisable features of the product.

For example, choice of colour and extras such as air-conditioning.

Additional services.

For example, delivery and recovery services.

Additional elements of the overall deal.

For example, a financing package and guaranteed buy-back price.

Quality and reliability.

Convenience.

Reliability will be more important to a customer who uses your product in a mission critical application.

A product will be worth more to a customer who can make a large profit from distributing or processing it.

Providing lifetime value for money is more important if you aim to get repeat business from the same customer.

Investor requirements (eg high short-term returns or long-term growth) and other external influences.

Your financial resources and your production capacity.

Your cost structure (see 4).

In many markets, a high price contributes to the perception of a product as being of premium value.

You may want to establish consistent pricing across your product range, or to position individual products �up� or �down� market.

Different strategies may be appropriate at different stages in the product�s life cycle.

For example, capitalising on existing customers� inertia at the end of a product�s life by charging a high price.

Customers will be more loyal if purchasing an unsatisfactory alternative carries significant risk to them.

If barriers are low, you may want to limit your prices (and achieve a merely acceptable return on capital employed) in order to avoid encouraging new entrants.

Customers who purchase repeatedly, or buy add-on or related products, are the most valuable.

Customers who are expensive to satisfy (eg demanding special features or service) will be less profitable, unless you can charge them higher prices.

One-off sales generally carry far higher costs than repeat business.

It does not take into account the level of demand and competition.

The price you need to charge depends on the volume you sell, which in turn will depend on the price you charge.

The mistake to avoid is failing to include all your costs in your analysis. If you do this, you will end up undercharging.

Cost-plus pricing reduces the pressure to control costs.

If you charge less than your direct variable costs, you will make a loss.

If you charge more than your direct costs, each sale will make a contribution towards covering your fixed costs and ultimately making a profit.

The contribution each sale makes towards covering your fixed costs tells you what volume you need to sell to reach breakeven.

If you have high costs relative to your competitors, you will need to position your product with a premium price.

The higher the proportion of fixed costs, the more important it will be to generate high sales volumes.

Some costs are unrecoverable if sales are not made soon enough.

For example, the costs of underemployed staff, perishable goods and products which become obsolete.

In the absence of other reasons, margins below industry norms suggest your costs are too high or your prices too low.

Industry margins provide a rough guide to the prices which may be achievable when considering new products.

Differences in costs can be a useful way of creating consistent pricing across a range of products or markets.

Analysing the additional costs can help to prevent you from undercharging for special orders or demanding customers.

Charging lower prices for high profile products to capture customers who will also buy higher margin products.

Charging different prices at different times of the day, week or year to reflect changing demand or the changing value to customers of your product.

Charging different prices for different levels of service or product specification.

In some industries, trade discounts are the norm and you may have to offer them to match the competition.

A cash payment discount can encourage early payment.

Some customers may claim the discount but delay payment anyway.

Clearance discounts can help you to sell off old stock and release working capital.

Bulk discounts encourage large orders, which may carry lower unit costs for you.

Retrospective discounts or rebates may encourage customers to concentrate their purchases with you.

Introductory discounts may encourage customers to try a new product.

However, they may create the wrong image for your product or generate sales which are not repeated when the discount is removed. They can also cause resentment among current customers.

Bundling additional products together and charging a package price.

This works well if the perceived increase in value is greater than the additional costs.

Charging a psychologically attractive price.

For example, �7.99 can be perceived as being more than a penny less than �8.00.

Charging a fixed price across a range of products.

This makes it easier for you to predict your income. Also, some customers may prefer being able to compare products without having to make price comparisons.

What is the competition doing?

How are customers� perceptions of the value of your product and competing products changing?

Products with high or growing market share may present an opportunity to increase prices.

If you pitch or tender for business, too high a success rate suggests that you are underpricing.

If both margins and market share are low, you need to change something � or discontinue the product.

Changing the price for a sub-sector of your market.

Introducing a new product at the new price while continuing to offer the old product.

Are you achieving your aims? For example, increasing sales to target market segments or smoothing capacity usage.

Are there signs of unwanted side effects? For example, reduced sales of full price products.

What is the overall effect on profits?

Give customers advance warning if they need to budget for your price increase.

What will the effect on sales volumes be?

What will the effect on margins be?

Use the price change as an opportunity to re-emphasise the benefits you offer.

A good explanation can strengthen your customer relationship.

By gradually introducing new, higher priced products and making old products obsolete.

By lowering the specification (and your costs), while maintaining the same price.

By improving the specification and raising the price.

It is wise to increase the price by more than the cost of the improvement.

Spending more on marketing and customer care may allow you to increase margins and turnover.

If in doubt, try higher prices first.

A low price may create an image of a low quality product and service.

Your target market may not be particularly price-sensitive.

While prices are low, so are margins.

Price-sensitive customers tend to be disloyal when prices increase.

Assigning a price to every component (eg delivery) and then giving it back as a discount highlights the value of your offer.

Then charge a full price for all the extras once the customer has decided to buy.

Non-negotiable prices can enhance your image of quality and value.