The greatest danger when setting a price for the first time is to pitch it too low. Raising a price is always more difficult than lowering one, yet there are great temptations to undercut the competition. It is clearly important to compare your prices to your competitors’, but it is essential that your price covers all your costs. There are a number of possible pricing strategies from which you might choose. These include:
- Cost based pricing - total costs are calculated and a mark up is added to give the required profit.
- Skimming - you charge a relatively high price to recover set up costs quickly if the product is good or new. As more competitors enter the market, you lower the price.
- Individual - you negotiate prices individually with customers based on how much they are prepared to buy.
- Loss leaders - if you wish to sell to a particular market then you might sell one product or service cheaper to gain market entry. You balance this by selling other products or services at a higher price. This can be risky as the danger is that everything becomes a loss leader.
- Expected price - what does the customer expect to pay? If you are selling a quality product, do not underprice. Often the customer expects to pay a lot as the product or service has a certain ‘snob’ value and this may be diminished if you underprice.
- Differential pricing - you charge different segments of your market different prices for the same service. For example, offering discounts to certain people like pensioners or the unemployed, or charging lower rates for quiet periods.
If, after working out your costs, the price you charge is much greater than your competitors’ then you will have to look at ways of reducing costs.