What is the best price for your products or services? It isn’t based on how many customers you have, how many salespeople you employ, the standards in your industry — or even what you’ve charged in the past.
Instead the best price is the amount customers will pay that effectively earns your company the maximum profit. In my experience, I’ve found that it’s significantly higher than what you’re charging now.
To help determine the best price for your product, here are five keys to remember:
1. The ultimate judge of whether your price delivers a superior value is the customer. Are your customers willing to pay more than you’re charging? One tell tale sign is if they’ve been complaining about your high prices. Not one customer, but lots of them. If not, you’re probably not charging the maximum allowable rate (MAR).
2. Managers often make fatal pricing decisions when they misread their competition. Every company and every product has competition, and sometimes it’s not an exact replacement of your product but rather the best alternative. Think driving instead of flying, or watching free fireworks at the city park with a basket of wine and food, instead of booking a table at your restaurant.
3. If you sell through “middle men” to get to the end-users of your products or services, those intermediaries affect your prices because you have to make their margins large enough to motivate them. You must also consider the expenses that intermediaries add, and then make sure they add value to the relationship between you and your customers.
4. How compatible are your products with each other? With your marketing objectives? With sales goals? Pricing is not a stand-alone decision. It must work in concert with everything else you’re trying to achieve.
5. Although the cost of the product is irrelevant to the customer, you shouldn’t ignore the direct and indirect costs. Too many businesses stop with an examination of their gross margin, and don’t parse out the margins on a product by product basis. Adjusting sales price based on the individual product cost, attributes, competition, etc. is a powerful way to increase your bottom line.
Pricing is one of the most dynamic tasks in any business. Be restless, be ruthless if need be, but don’t price it and ignore it.