The more you can differentiate your products or services from others the wider the range of possible prices you may be able to charge as the customer has little to compare what you are offering against.
If you can differentiate what you are offering, a higher price may work better. People automatically value high priced items more than low priced items and some people just wouldn’t buy a low priced item on the belief it is also low quality.
The perceived value to the customer must be greater than the price or they won’t buy.
Most people don’t know how to price a product or service.
Your price will not ultimately be determined by you but by what your prospects are prepared to pay. You can only find this out by testing different prices. But do you know how to price a product or service for testing purposes?
When determining how to price a product or service you will have always have a minimum price below which it doesn’t make sense to sell your product or service. After all, you’ve got your overheads to cover and the minimum amount you need to earn to cover your personal living costs.
To test how to price for the optimum price you need to test some price points. If you can differentiate what you do, look at raising prices by 25% or even 50%. If you can’t differentiate what you sell from your competitors, small increases are likely to be more relevant. Then record the results. You also need to test to see if price decreases make you more profit.
It has been proven in studies that the price sensitive points work such as £99 rather than £100, although it has also been shown more recently that many people now read £99 as £100 and that you actually need to change a 9 to a 7 with many people for it to have an impact. So look at using prices that end in 7 as much as you can.
When you test how to price then ensure that you measure the impact of price movements on profit and not on sales levels.
Let’s look at an example for a company, Widgets Limited.
Widgets Limited are the Ronseal of the widget world (if you don’t know their ‘does what it says on the tin’ slogan then look up their advertising campaigns on Youtube – or their best advert ‘the apology’.
So, I digress, I love marketing!
Widgets Limitd sell widgets…and the owner, Mr Watsit came to use wanting some help about how to price his products and importantly, what effect any proposed price changes would have on profits.
We had his existing data about how to price, which was historically what he thought his customers would pay. Needless to say this had never been tested.
His data looked like this:
| Sales (1,000 widgets @ £100ea) | 100,000 |
| Cost of sales (1,000 widgets @ £70ea) | (70,000) |
| Gross profit | 30,000 |
| Fixed overheads | (25,000) |
| Profit | 5,000 |
But he came to use wanting to know how to price their products, but this could easily be a question of how to price a service.
IN my line of work, the question that entrepreneurs always have is ‘am I going to be better off by reducing prices by 10% or am I going to be better off by increasing them by 10%’. They and you simply want to know how to price. Or moreover, how to price for the best profit.
The only way to find out is to test.
So this is what Widgets Ltd did and after testing, they find out …
- Option 1 of reducing prices by 10% results in a 20% increase in quantity sold, and
- Option 2 of increasing prices by 10% results in a 20% fall in quantity sold.
I must say, the testing is critical. You can not unilaterally change prices, hence we always advise our clients to find out how to price their product (or service) by testing the new prices firstly on new customers. In this way you will not upset the apple cart with you existing customers.
Having testing the effects of price, we know need to know what should they do?
It’s tempting to go for option 1 with 20% more sales with only a price cut of 10%. After all, most entrepreneurs want more sales!
But lets look at what happens…
Option 1
| Sales (1,200 widgets @ £90ea) | 108,000 |
| Cost of sales (1,200 widgets @ £70ea) | (84,000) |
| Gross profit | 24,000 |
| Fixed overheads | (25,000) |
| Profit/(loss) | (1,000) |
Now if we look at, selling less (which goes against the grain of most entrepreneurs), lets see what happens…
Option 2
| Sales (800 widgets @ £110ea) | 108,000 |
| Cost of sales (800 widgets @ £70ea) | (56,000) |
| Gross profit | 32,000 |
| Fixed overheads | (25,000) |
| Profit | 7,000 |
Raising prices is better.
In addition you have less work to do for more money.
Every situation will vary depending on your profit margins, which is why it’s important to do the numbers. However, using discount pricing will generally mean you do have to significantly increase sales volumes to make more profit.
Want to know more? We have a free ‘effects of price on profit’ calculator. To get your free copy of this so you can calculate how you can find your best selling price then click here