One of the most important things a business will do is price its products or services. However, this is also one of the most complex processes of any business, because there are many variables to consider. I’ll be breaking down the process here and offering insights from a marketing perspective.
Initially, a look at your competition is necessary. Competitive analysis will tell you if your product or service is viable and whether your pricing strategy is even in the right ballpark. Be sure you’re comparing apples to apples, and pull analysis from businesses with similar models, products, and services. Take into consideration your geographic location (businesses in different areas may be able to charge more or less) and be sure to pick two or three immediate competitors — those offering the same or extremely similar product or service — with which to compare to your business.
Next, look at your product or service directly. Beyond the base pricing that should be built in for overhead, labor and materials, take into consideration the quality of your product or service. Are you the only business providing this product or service? Is your product or service superior to others offered in some way? Consider the benfits to your customers as well. Can you do something faster or with more value to the customer than competitors? Are customers willing to pay for convenience or reliability? Offering convenience to your customers is worth something, and some are willing to pay a premium for that convenience. Wherever possible, your business should set prices based on the value you provide.
Finally, using the competitive analysis that has formed your strategy thus far, determine if you should be pricing higher or lower than your competition. There is a strategy to undercut competitors, but you need to be careful to avoid a “race to the bottom,” since every business (yours included) will eventually lose that race. Your business might be able to afford to undercut on a product or service to draw in clients, and then make up for it in upselling. Or perhaps your overhead costs are lower than the competition, so you can still afford to charge less than your competition. If your product or service is superior, keep in mind undercutting competitors could cheapen your product, service or entire brand. When a customer compares your products to your competitions’, a higher price point than your competitors’ may demonstrate to the market and your potential customers that your product has superior value.
Pricing your products or services isn’t a one-dimensional task, and you can always benefit from brand and competition analysis. Consider bringing marketing and brand experts in to help effectively analyze your competition and price out your products or services. Z3 Digital has helped many of our clients through this process and we’ve learned that every business and every market requires slightly different strategies and processes. But doing your homework on the front end will position you for success when your business sets out to determine what it will charge for its products and services.
Timothy A. Zercher is president and CEO of Z3 Digital. He can be reached at firstname.lastname@example.org.