Planning and preparation 4 - Develop effective pricing strategies

The most frequent mistake made when setting a selling price is to pitch it too low. This mistake can occur either through failing to understand all the costs associated with making and marketing your product, or through yielding to the temptation to undercut the competition. Both these errors can lead to poor results, so guard against them.

Costs

Make sure you have established all the costs you are likely to incur in making and marketing your product. Do not just rely on a guess or common sense; get several firm quotations for every major item. Remember to factor in a percentage of overhead costs.

Customer perceptions

Customer's opinion of value may bear little or no relation to the cost, and they may be ignorant of the price charged by the competition, especially if the product or service is a new one. Many consumers perceive price as a reliable guide to the quality they can expect to receive.

Competition

Take into account what your competitors charge, but remember price is the easiest element of the marketing mix for an established company to vary. They could follow you down the price curve, forcing you into bankruptcy, far more easily than you could capture their customers with a lower price.

Business conditions

In boom conditions, where products are virtually being rationed, the overall level of prices for some products could be expected to rise disproportionately. The converse is also true. Seasonal factors can also contribute to changes in the general level of prices.

Channels of distribution

Your selling price will have to accommodate mark-ups in your industry. For example, a store may expect to set a selling price of double that charged by its supplier. If your market research indicates that customers will pay £100 for a product bought from a store, you, as the manufacturer selling to a store, would only be able to charge £50.

Exchange rates

If you are exporting your goods, then currency fluctuations can have a major impact on your return on sales. Always factor in possible changes in exchange rates when working out your margins.

Price is, after all, the element of the marketing mix that is likely to have the greatest impact on your profitability. It is often more profitable for a new company to sell fewer items at a higher price while getting its organisation and product offerings sorted out; the key is to concentrate on obtaining good margins, often with a range of prices and quality. If you have to increase prices, try to combine it with some new feature (for example, new design, colour scheme) or service improvement.