How to Develop an Effective Pricing Strategy to Maximize Profit?

One of the most challenging responsibilities for small business owners might be setting the appropriate price for goods or services. If prices are too low, you kill your chances of profit. But if they’re too high, you could alienate your customers. Either way, both scenarios can crush a business.

Price is not determined by intuition. Instead, it’s dictated by your industry, your geographical location, the economy, the time of the year and more. These factors are rarely constant, so business owners must be willing to test prices, reassess strategies and implement changes as needed.

To move forward with setting prices that your customers will actually pay, follow these tips to develop an effective pricing strategy to maximize profit.

1. Establish a Minimum Price Point

When setting prices, you must take into account how much it costs to run your business.

Calculate the materials, cost of rent and labor needed to produce your goods. Also include operational expenses, salaries and any marketing costs. Then, divide that total by the number of units you plan to sell. This will give you the true cost of your product. In order to profit, you must charge more per unit than the per-unit cost of production.

2. Determine Payment Structure

Most tangible products tend to fall under one-off pricing, where customers purchase the product once and don’t purchase again until the need arises. Services, on the other hand, are often subscription-based, where customers pay a monthly fee in order to continue using the service.

Because subscriptions tend to require less money upfront, businesses can often charge more over a longer period of time than one-off pricing structures.

While this is great for services, a subscription-based pricing strategy doesn’t work well for most products. Additionally, depending on the goods you sell, you might want to establish bulk pricing, where you offer discounts depending on the number of products a customer purchases. 

3. Assess the Value of Your Product

If customers see value in your product, they’ll be willing to pay for it. Customers will also pay a premium for products that solve real problems in their lives or drastically increase the quality of their lives.

Take the time to think about the perceived value of your offerings from the perspective of consumers. The more value your products or services offer, the higher you can set your prices compared to less-valuable offerings from competitors.

4. Understand Your Target Customers

Who is likely to purchase your products or services? Are you dealing in luxury goods that only appeal to high-income customers? Or do your products and services have more mass appeal? Are you competing with a specific company? Or are all companies fair game?

For some customers, price isn’t an issue, and they’ll be willing to pay whatever it takes to have the best product on the market. For others, selling your wares may take more than just having what’s perceived as a great price. The most attentive business owners will take the time to understand their customers and adjust the pricing accordingly.

Additionally, how customers use your products or services will play a key role in their price sensitivity. People tend to be more sensitive to the prices of items or services they purchase frequently, such as toilet paper or lawn care services. However, they tend to have less price sensitivity to big one-off purchases, such as a car or computer.

5. Survey Your Customers

Surveys offer one of the quickest and most direct ways to find out what your customers are willing to pay for an offering. With just a simple survey, you can gain insight on questions such as:

  1. Which company do you feel offers the best [insert your product or service]? Why?
  2. Which company offers [insert your product or service] at the best value? Why?
  3. Which [insert your product or service] do you use?
  4. What would it take for you to consider another option?
  5. How much do you expect to pay for [insert your product or service]?

Don’t forget to ask subjective questions about your offerings, such as “What do you love or hate about our product?” The answers you receive may give you insight into how to promote the value of your product or service. Those answers might even steer you away from poor marketing strategies.

6. Compare Competitors’ Pricing

Analyze your competitors to see the quality of their offerings as well as their price points. Determine the key features and benefits of their products, and decide how your products or services compare to theirs.

What do they offer that you don’t, and vice versa? What is your clear advantage over them?

It isn’t always necessary to beat the competition. You can charge more if your goods are of much higher quality or if you offer a better consumer experience.

7. Figure Out Your Position in the Market

Fully understand how you want customers to perceive your brand. If you want to offer the most budget-friendly option in the industry, you will have to beat all of your competitors’ prices. However, if you want to be perceived as a luxury provider, your prices will likely be higher than your competitors.

Whatever your favored position, be sure to develop a solid, unique selling proposition to help justify it.

8. Commit to Fair Pricing

If your product costs mere pennies to make, but you put a huge price tag on it, customers could feel like they’re being gouged.

Ensure that customers know the total fiscal value they will receive from your products so that you can justify your costs. However, be fair with your pricing strategy; otherwise, you will lose business fast. Surveying your customers will tell you what they feel is fair.

Transparency is also important, especially when justifying sudden price hikes. While you aren’t expected to reveal every facet of your pricing strategy, being upfront about what caused a pricing shift can earn you a reputation as a fair dealer. Your customers may welcome your honesty by opening up their wallets.

9. Don’t Go Too Cheap

While beating your competitor’s price does work in some cases, don’t make it your only benchmark for establishing a pricing strategy. First off, if you price everything too low, you could destroy your bottom line. On top of that, selling products or services at rock-bottom prices can lead customers to question the quality of your offerings.

If you’re faced with pricing that you can’t match, find other ways to compete. Consumers love superior customer service, and many are willing to pay a premium for the privilege. You could also spend time developing a superior product or creating a brand new one to blow the existing product out of the water. 


onEntrepreneur is an online magazine centered on the world of business, entrepreneurship, finance, marketing, technology and much more. We are regularly updated – sign up with our newsletter to send the updates directly to your inbox.

Leave a Reply

Your email address will not be published. Required fields are marked *