10 tips for perfect pricing
- Juliëtte Geers
- How to
- 4 Jun 2020
- Edited 19 Dec 2022
- 4 min
- Managing and growing
Energy, fuel and raw materials: everything is getting more expensive. At the same time, minimum wages are also rising. All these changes affect the price of your product or service. But how do you figure out a good price? 10 tips for pricing your service or product as the economy changes.
There are several ways to respond to economic changes. For example, by raising your prices or launching a new product that is suddenly in high demand. In both cases, you have to set a price.
1. Figure out your price breakdown
Figuring out your price breakdown will tell you how much you have to make per product or hour to recoup your costs at the very least. And you will also be able to properly explain any price increase to your customer.
Announce higher prices or just introduce them? | Costly dilemmas
The main ingredient of your product price is the cost price, a summary of all the costs you incur. This can include raw material costs, the price of semi-finished products, and the time you spend making the product. You then mark up these costs with a profit margin. You need profit to pay for your operating expenses, to develop new products, or to digitalise your processes. If your costs are rising, increase your price according to the price index. If your expenses are rising, price them into your product prices. If you know your price breakdown, you can always substantiate price hikes when asked.
2. Familiarise yourself with pricing rules
Are you are a supplier selling a product or service? Then check the the pricing rules of the Netherlands Authority for Consumers and Markets (ACM, in Dutch). Suppliers can recommend any retail price they want, but your buyer is not obliged to use your recommended retail price. Retailers who purchase products from suppliers can perform a recommended retail price check (ACM, in Dutch). Make sure to look into the rules on advertising and promotions, too, as they will be changing on 1 January 2023.
3. What is your customer paying for?
Figure out the customer value of your product or service. In other words, determine what your customer gains from buying your product. Apart from quality, customers also pay for emotional value, such as a brand name, a good feeling, or service. On top of that, customers also pay for speed and convenience. People looking for a photographer for their wedding or newborn baby have different expectations than someone who wants a quick passport photo. Do you want to discover your Unique Selling Point, the reason that customers pick your product? Then fill out a Business Model Canvas and decide on a revenue model.
High prices and price hikes have two consequences: your profits will increase and customers will believe that your product is worth more.
4. Map your position
Compare the price or hourly rate you want to charge with the prices of your competitors.
- With a lower price, you are likely to sell more products than your competitor.
- With a higher price, you are likely to sell fewer products than your competitor. Think carefully about why customers would be willing to pay a higher price for your product or service. The reason you come up with is your so-called Unique Selling Point, or USP, which should also be a big part of your marketing.
- If you charge the same price as everyone else, you will be in direct competition. Find a way to stand out from sellers offering the same product to give customers a good reason to pick you.
Satisfied with your positioning? Show it with your own corporate identity (in Dutch) or personal brand.
5. Vary your profit margin
Remember that you do not have to make the same margin on every product or service. Margin is what remains when you subtract the purchase price from the selling price. If you buy an apple for €0.70 and sell it for €1, for example, your profit margin is €0.30.
Take a good look at all your products or services. What is your highest-margin product or service? When you have the answer, do everything you can to sell that exact one.
6. Vary your prices
You do not have to charge fixed prices. Rush orders (in Dutch), weekend jobs, custom products: you can charge different prices for each one. Make your prices variable and dynamic. Charge different rates for off-peak and peak hours or for extra service options. Some cafés, for instance, charge less for coffee when business is slow and many cinemas have special offers on Mondays. Pricing variation can help you influence customer behaviour.
The more data and information you have on your customers, the better you can use this tool. It comes in particularly handy during the digital ordering and shipping process (in Dutch). Airline tickets can change in price by the hour, you pay more for plumbers in the weekend, and pay higher rates for prime-time services. At the same time, you can also offer better prices to regular customers or subscribers.
7. Need more turnover?
Increase your sales. You can also increase your turnover by increasing how many products you sell. You can boost sales by
- finding more customers.
- increasing your order size. On average, a customer spends a higher amount each time.
- having your customers make more frequent purchases. You can do this by drawing up a marketing plan.
8. Down payment for in-demand products and services
If demand outstrips supply, ask your customers to make a down payment. For example: if your restaurant has to deal with lots of no-shows, ask them to make a down payment to reduce the odds of last-minute cancellations.
9. Use the psychology of price
Another way to influence sales is by leveraging intuition and emotions. Our brains, for example, are better at rounding down than rounding up. For that reason, we buy more products with a price ending in .99. On top of that, research has shown that customers want to minimise ‘pain’ while making a purchase. Using a smaller font will literally make the price feel lower. Similarly, leaving out the euro sign makes a price seem more reasonable. Do you have paying subscribers? A big annual bill hurts less than a fixed lower monthly payment.
10. Want to sell more?
Give extras instead of discounts. Tip #3 told you that customers believe that more expensive products are better. Conversely, discounted products seem inferior or can make your previous price seem inflated. You can avoid this by offering customers extras for the same price. Consider surprising your customer with a memento, beautiful packaging, or VIP Services.
Importantly, a new law was introduced in mid-2022 to combat misleading discounts. You are no longer allowed to temporarily increase the price of your product only to lower it later and claim you are offering a discount. The price advertised as the ‘was price’ has to be the lowest price you charged in the 30 days prior to launching your promotion.
With these tips, you have all the tools you need to figure out a good price. Remember: if your prices are too high, no one will make an order. And if they are too low, you will not make enough to cover your costs.