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Monday November 17, 2014

Pricing products and services

An integral part of business success is knowing what to charge for your products and/or services.

 

Setting the right price doesn’t have to be a ‘pie in the sky’ process - it is a balancing act between your profitability and maintaining a good relationship with your customers. 

 

Customers would consider the price to be fair for the service or products provided, while the business would cover costs and make a profit. A win-win situation.

 

And while some large, long-established or luxury brands are able to set prices based on demand and image, most of us need to start with the basics in order to make a profit.

 

This comes down to understanding the difference between margins and mark-ups, and what money (profit) is ultimately being made on each job.

 

  • Margin – the difference between your revenue and the costs of the goods and services sold. For example:

 

Sales

$150.00

Purchases

$100.00

Profit

$50.00

Mark up

33.33%

 

  • Mark up – the difference between the cost of the goods and services you are selling, and their selling price in order to make a profit. For example:

 

Sales

$150.00

Purchases

$100.00

Profit

$50.00

Mark up

50%

 

Setting the right pricing also involves understanding your market – who are your customers, how much they are willing to pay, what are your competitors charging, and what (dollar) value are you placing on your skill and time?

 

This insight can only be gained through experience and/or thorough research.

 

Depending on your business type, product or service offering, there are a range of common pricing strategies to consider. For example:

 

Skimming pricing –initial prices are set high to attract 'early-adopters', and then reduced to appeal to more price-sensitive customers.

 

Penetration pricing – aims to achieve high sales by setting a lower price. To be profitable a broad target market and high sales are needed.

 

Image or premium pricing – think Louis Vuitton or Porsche. Customers are willing to pay top dollar because of the value they place on the product.

 

Discount pricing – customers are willing to forgo some quality or service for a lower price.

 

Flexible pricing – for example, offering discounts for bulk-buying or returning customers. This rewards customer loyalty, encourages positive word-of-mouth and increases sales in the long term.

 

At Marley Loft, we encourage our clients to review pricing annually, at a minimum. 

 

Whether you’re a start-up or reviewing your existing fee structure, effective pricing can help you avoid the serious financial problems that may occur if your prices are too high or low.

 

For advice and assistance on setting a fair price for your products and services, the Marley Loft team are here for you.