Tips on Setting Prices that Sell Your Product or Service
A friend was pumping gas the other day and paying $1.27 a gallon. He snapped a picture on his iPhone and posted it to Facebook. The comments came pouring in. Most of his friends were envious.
They were envious because they had intimate knowledge of the price of gasoline. They knew it when it hit $4.00 a gallon and they knew it when it started to get down in the $2.00 a gallon range. For most of his friends, $1.27 set a low-water mark in the current pricing world and it is certainly a price that would sell a lot of gasoline in today’s market…which is what producers are hoping for.
I mention this because the pricing knowledge your customers or clients have is one of the major factors you need to use to set your prices if you want to maximize sales. The less knowledge they have, the more flexibility you have when you set prices. And when you consider this point, take all the attributes of your product or service into account.
A quick case study
To see how this impacts pricing, let’s go through a quick case study. I know the owner of a small motel. We all have an idea of what it should cost to rent a motel room. However, his motel is in a rural area and there are no other motels. He doesn’t have to price his motel using a general motel “frame of reference.” He needs to consider the competition, which is our second point.
In this rural area, his only lodging competition are very high priced bed and breakfast inns. Comparing the “features” of his business to the B&Bs, he falls short in most areas but he has the ability to be the low-price leader. Because of this he must decide how much he wants to undercut the B&B pricing and to sort that out, he needs to understand his customer.
Some products appeal to more than one group of consumers. This little motel rents rooms to different kinds of clients. I’ll break it down into three groups:
- Those who would stay in the B&Bs if they could afford it,
- Business people passing through the area or staying for several days to complete jobs, and
- Relatives of locals who don’t have sufficient space for guests.
With this mix of potential customers, how should he price his rooms? The first group would probably pay higher prices. The second group might stay out of the area and drive in to do their work if the price is too high. The third group is difficult to measure.
Variation among consumers
Examining the habits of the customers reveals more information. People in the first group generally spend weekends in this rural area. The business people often stay during the work week. Relatives could come at any time.
He has some options. He can set higher rates on weekends and lower rates during the week. Another option would be to have standard rates, but promote a special rate for business travelers. Finally, he can locally advertise a “Make us your guest room” rate to local residents. That would help him pick up business and also strengthen his tie to the community, which will result in more word-of-mouth advertising.
There are many ways to set your pricing. For some products, many sellers merely double their costs. However, you can maximize revenue if you consider these points and use them to influence your pricing decisions:
- What consumers know about your pricing,
- Your relative pricing position versus the competition,
- Your features versus the competition, and
- The various segments of your market, including niche consumers.
