Your Pricing Strategy Is Wrong If You Aren't Doing This
Written by Michael Manley
7 min Read
Learn what Pricing Strategies you should be implementing for your Small Business:
Cost plus pricing for small business.
Why you need value based pricing.
Research the market.
Other Techniques, price skimming and penetration.
Pricing your business.
One of the queries I’m asked most by individuals beginning their own rental business is “How do I set my pricing?” the solution is a sophisticated one. These methods can be applied to other businesses as well as rental.
As you think about setting prices, you’ll want to check out your customers’ other choices. Look at competitors’ pricing and think about alternatives your product will replace. Are you primary competing with your customers buying the object rather than renting? Renting/Buying the same product from someone else? Or are you offering something unique?
Start iterating your numbers. After you land somewhere, you’ll want to see where you line up with your competition. Positioning yourself high than, below, or at the market, the average is your own prerogative. Don’t be afraid to aim high or low. As a business owner, you get to choose your prices. Don’t sell yourself short. Lowering your pricing to much can be a costly mistake. Your pricing should take into account your brand, convenience you’re offering, and the experience you create for your customer.
Setting the best prices for products is a balancing act. Price your products too low, and you might see plenty of usage without turning any profit. Price them too high, and you’ll probably hire them out less frequently and attract fewer price-conscious customers.
In essence, there are two ways to determine the right price for your product equipment: calculating cost plus margin and using that as your starting point, followed by researching the market and positioning yourself somewhere along the spectrum. While most companies use these techniques separately, they’re more powerful when combined. Let’s cover them in more detail, so you get a reliable strategy for pricing your product.
5 Pricing Strategies for your Small Business:
1) Cost-plus pricing:
Simply calculating your costs and adding a mark-up
The first approach, calculating your cost plus margin, helps you determine what you need to charge to run a profitable business. You can do this by figuring out the cost of ownership of your equipment (which includes the elements mentioned at the beginning, such as purchase prices, depreciation, maintenance, shipping and other expenses). Once you know your break-even point, you can start looking at margins and set some revenue goals. If you need $40 to break even and want $40 in profits, you need $80 of revenue.
Direct equipment cost= $20.00
Direct depreciation cost= $5.50
Allocated overhead = $8.25
The rental equipment company applies a standard 30% markup to all of its products. To derive the price of this product, they add together the stated costs to arrive at a total cost of $33.75 and then multiplies this amount by (1 + 0.30) to arrive at the product price of $43.88.
Advantages of Cost Plus Pricing
The following are advantages to using the CTP method:
Disadvantages of Cost Plus Pricing
- Ignores competition.
- Product cost overruns
- Ignores replacement costs
2) Valued Based Pricing
Setting a price based on how much the customer believes what you’re selling is worth
In value-based pricing, the perceived value to the customer is primarily based on how well it’s suited to the needs and wants of each customer. Besides studying who you’re up against, it’s helpful to gather insights about potential customers because, well, they’re the ones who are going to rent from you. Which prices are they willing to pay for your product? How big of an influence is pricing in their decision-making process? Questions like these help you get inside the minds of your customers and make sure you come to a reasonable rate for your equipment. This method factors in external elements and helps you uncover pricing-related opportunities in your industry.
Dolansky says a company can gain an advantage over its competitors in the following ways.
- The price is a better fit with the customer’s perspective.
- Value-based pricing allows you to be more profitable, meaning you can acquire more resources and grow your business.
- When a price doesn’t work, the answer isn’t just to lower it but to determine how it can better match customer value. That may mean adapting the product to better suit the market.
3) Research the marketplace (Competitive pricing)
Setting a price based on what the competition charges
Another approach to setting rates (and gaining more perspective in the process) is by doing market research. The goal is to get a view of standard practices in your industry and set a benchmark. You can do this by analysing companies with comparable products and how they position themselves. Are they a premium choice in the industry? Are they low-balling other companies? Or are they somewhere in the middle? Analysing direct competitors makes you realise who you’re up against, and might even uncover opportunities you could have missed otherwise.
4) Other Techniques
- Price skimming — Setting a high price and lowering it as the market evolves
- Penetration pricing — setting a low price to enter a competitive market and raising it later. This strategy is recommended to newcomers entering the market if it doesn’t put your business at major risk.
5) Pricing your Business
You will never have the perfect price, you will only ever have what is working best for you at that time. Every business requires a different strategy, the best strategy is what’s best for your customers. Constantly analysing and adapting in your market will give you the best-informed decision on pricing your product.