Establishing a pricing strategy reflective of your value that clients agree is fair, is difficult. Here are three different pricing strategies to consider when establishing one for yourself or you company.
First Things First: Pricing Strategy Considerations
Before establishing price points for either your goods or services, there are multiple factors that need to be considered:
- Who is the target audience your product appeals to?
- What are your production and distribution costs?
- Who are your competitors and what are their pricing models?
- What is the true value of your services? How much time or money can it save your clients or customers?
What is the True Value of Your Product or Service?
It’s helpful to evaluate what your product or services are truly worth. Begin by asking yourself a few questions:
- Do you offer a more valuable experience than competitors?
- Is there something you offer that others don’t?
- What is unique about your business?
- How many years have you been in the business?
Examine the value of your business and keep it in mind while exploring different pricing strategies. Check out this great webinar from Chris Lema with 7 tips for value-based pricing.
Most importantly, do not under-value your worth. If you do, potential customers will question it too.
Elements of Pricing Strategies
There are a number of different pricing strategies. The following section digs more into the pros and cons of various approaches to pricing.
Hourly pricing is often intimidating to clients because it seems risky. Charging by the hour doesn’t offer any kind of a fixed payment rate and clients must be able to trust every hour is used efficiently.
On the upside, clients only pay for the work completed and if the need arises to expand the project, hourly pay makes it much more doable.
Hourly pricing can also protect you from handing out “free” work because the time you spend working is accounted for.
A way to offer some assurance to clients with the hourly pricing method is to set a max amount of hours on a project. This will create a sort of deadline for you to hold yourself accountable and define a maximum monetary amount.
Per Project Pricing
Modeling a pricing strategy by charging per project is similar to charging an hourly rate.
Creating a quote on a per-project basis is based on the number of hours a project is expected take. The hourly rate just isn’t included on the proposal itself.
The downside to this method is if you go over the agreed quoted amount of hours, it is more difficult to negotiate a higher payment.
To accommodate both the ability to easily expand a project budget, if the need arises, while offering the client a fixed rate, create a hybrid between hourly and per project pricing.
Create fixed prices for standard work aspects and price more complex, custom work on an hourly basis.
This will allow protection and provide a compromise between both you and the customer.
Make a Profit: Avoid Cutting You or Your Business Short
Regardless of which pricing strategy you choose, it’s imperative that detailed contracts and agreements are drafted and implemented before any work begins.
Do not hand over any work before you have collected payment.
Consider requiring 50% up-front and collecting the remaining 50% at the end of the project.
Another idea is to require 50% at the beginning, 25% halfway through and the remaining 25% at the end of the job. This way, half of your profits are not being held hostage and you will have money to comfortably cover all costs throughout the project.
Avoid allowing freebies. It’s easy to just make a few quick changes for clients, but the collective time you spend on each client making small changes adds up quickly.
Track your time and have a plan for how to handle the extra time. Make sure clients are clear how this time is priced out before you ever do the work.
3 Different Pricing Strategies
Pricing strategies should take into account a complex set of calculations.
The following examines 3 different pricing strategies. Think about your target audience and competitors as you decide which one is best for you.
Price skimming is a pricing strategy referring to the practice of initially charging the highest price customers will pay. The price is lowered as the demand is met to attract a more frugal customer segment.
This is a good strategy to use to maximize profits. It increases quality perception for buyers who use price to measure quality.
Over time products lose their appeal and the price will need to be dropped to attract the price-conscious buyers.
Economy pricing is a popular pricing strategy for big businesses like Walmart or Target, but can be risky for small businesses. With this strategy, companies take a bare minimum approach in order to keep prices low. This allows customers the ability to purchase the products they need without unnecessary frills.
Small businesses should probably avoid this strategy because they lack product volume. The low prices have a greater potential to fail to generate sufficient profit. Instead, small businesses should think of ways to offer low prices to valued and loyal customers through promotions, points, etc.
With a penetration pricing strategy, businesses aim to attract consumers by offering low prices. This method undercuts the competition and increases sales.
Once the product or service has established a place in the market, prices are increased to more reasonable amounts in efforts to make up for the lower price point. With penetration pricing, there is an increase in overall sales and you have made consumers feel like they are getting a great deal. When people find a good deal, they tend to share the news with friends and family, providing you free advertising through word of mouth. As an added bonus, an increase in sales means you have the potential to buy in bulk at discounted rates.
There are drawbacks to the penetration pricing method. You risk the assumption that because your prices are so low, the quality must be poor. Additionally, businesses must be prepared to keep up with product demand, and have a good promotion strategy.
More About Choosing a Pricing Strategy
Explore more pricing strategies with your business in mind. Choosing a pricing strategy depends on the type of business you run and whether you sell products or services or both. It’s important to know what competitors are doing and examine who is most successful. Research the pros and cons for every method and prepare yourself and your business for either outcome.
Saylor writes blog posts and designs/develops various projects for iThemes. Saylor loves gardening and is currently at war with all squirrels (if anyone has tips on how to get rid of squirrels, she’s all ears). If she’s not traveling or hanging out in OKC, there’s a good chance she’s in southwest Oklahoma doing manual labor, including roofing, or as her father likes to call it – “building character.”