Almost all entrepreneurs go through the process of figuring out how to price their business’s product or service. Admittedly, this is a challenging process which isn’t a complete science. It is part luck, part savvy and experience and part persistent experimentation.
Experimenting With How To Price Your Product Or Service
If you ask the CEOs of most companies about how they came up with the optimal price for their company’s product or service, they will probably tell you that it was an initial guess that was followed by some experimentation. Of course, this guess is typically made by very savvy business people who have a strong sense for their current market environment and their target consumer.
An additional factor that goes into deciding the price of a product is the demand for the product. If the product or service solves a strong need, that builds the case for increasing the price. Understanding the needs and spending abilities of your target consumers can go a long way to helping you choose not only the pricing strategy, but also the entire marketing strategy.
How To Price Your Product According To Supply And Demand
If your business does not have many competitors, you can price your product according to the supply and demand model. If you can provide all the supply, you can unnaturally manipulate the price of the product and charge as much as you can possibly get away with until your customers become blue in the face. If your product or service is in serious demand, and is an absolutely needed item, your customers will be forced to pay for it. Unfortunately, for most businesses, that doesn’t last forever. At some point competitors pop up and make life more difficult by generating competition on quality and with price pressure.
Should You Compete On Price?
In theory, competing on price is never a good idea. But in practice, it happens almost all the time. Consider why all your local restaurants charge approximately the same prices for their food as other restaurants that are comparative in food quality. That is a result of competing against other restaurants all over your city. At some point, restaurants lower prices to entice patrons. Then other restaurants realize that and bring their prices lower as well. They do so until the profit margin they are left with is very small.
This is what brings eventual doom to most restaurants. But this is also the defense strategy of the restaurants that survive because if new restaurants can’t compete on the level of profitability, then they go out of business. Restaurants that aren’t as profitable have to either operate at a loss or must charge higher prices. Operating at a loss is simply not sustainable and charging higher prices will turn away patrons who will go to eat at competitive restaurants.
How To Price Your Product In A Competitive Environment
As we see, most businesses must eventually compete on price in such a way that they can still be profitable. This necessitates a very savvy business model that accounts for getting as many customers as possible while making sure that serving them is as profitable as possible for the company.
In competitive business environments, the price is typically driven very low by competing companies trying to outcompete one another on price. In such cases, you can use elements of the freemium business model to help you outsmart your competition.
Get One On One Coaching To Help You Price Your Product
I can help you brainstorm your pricing model as well as your overall business strategy. I have helped over 1,000 entrepreneurs by providing help on issues like raising money, business strategy, marketing and business planning. Learn more about my business coaching here.
Author: Alex Genadinik