Kudzai M. Mubaiwa
Finding a balance between maintaining high customer satisfaction and maximising profits is the desire of every small business owner. Once the business gets this aspect right, it will be assured of longevity in any market. Most new business owners struggle with determining the pricing of goods and services.
Goods are generally easier, one can have a standard mark-up or margin, and this can be informed by rating yourself in comparison to the market and either adding a premium or a discount, depending on where you rank.
With services it is much trickier, typically pricing is difficult to benchmark as competitors are unlikely to share their numbers. Pricing strategy is essential because business success is measured using numbers.
This topic is especially important for Zimbabweans because we experienced seasons of hyperinflation, whose effects have taken long to wear off.
In my line of work with small-scale enterprises, I have met many business owners whose pricing model simply comes down to a multiplier — whatever the cost price is, they then multiply that by two. Such methodology is flawed, as it may not necessarily cover the cost of doing business, it may be too low and fail to sustain the enterprise, or possibly be too high and cause the business to fail to close sales.
There are several models for pricing, more than 25 viable ones, and each business must consider its circumstances, geographical location, demographics of gender and age, disposable incomes of people where it operates, seasons, and other external conditions at the macro level.
What remains important is to recover costs, make profit, and continue as a going concern. Your business economic model must correlate with your pricing model, you must know your break-even point — the level at which you make enough money to cover costs.
Here are some of the most common pricing methods:
Cost: Plus is the simplest and probably most obvious one. You ensure that all expenses and costs associated with getting a product or service ready for delivery to market are accounted for — so if the business is selling stationery, the costs of transport, stock, personnel, telephone calls, internet, an office as relating to that order are all computed and recovered. The business would put in a margin. Simple as it may seem, this method is not obvious to all.
It takes time and effort to track expenses associated with a business but it must be done, lest one realises they were in fact just passing on products to the market for free — or was overdoing it on the margins and hence stifling sales.
Turnover, by itself, is not a correct representation of business performance — it must come down to the bottom line — profit. It is generally accepted that a small business that makes margins of 30 percent and above for most project types is doing reasonably well and can continue as a going concern.
Penetration pricing is that which is done by most new products when they are entering the market, they will start high and raise the price later.
Again, it matters to know what your break-even point is, so that you can measure the amount of room you have to manoeuvre as the market adjusts to your product/service.
Once a reasonable customer base has been established, and a pipeline of return business secured, one can raise their price.
This is usually the case with food and beverage products where the goal of initial pricing is literally to get people to acquire a taste for it, check the quality and consume it more as an alternative to a usual product.
This method works well for reaching out to price sensitive consumers, but that can be your downfall should they find a similar product cheaper.
Freemium pricing is that in which consumers get basic features at no cost and can access advanced features, products or services for a fee.
It is typical of innovators who have made a mobile application or a platform and want you to try it out first.
It also works quite well for services where the business owner can afford to do work for “free” to a certain level, then invites those who want more to pay.
This is an important pricing model in this digital age where many people can create content and share it through social media such that people benefit from them for free through written tips and/or audio and video tutorials. Those that want to get additional service can then pay something.
Pay What You Want is yet another pricing model. It is based on value that customers place for a good or service and is yet another one that has become popular in the digital age.
The internet allows fast price discovery so customers can easily compare prices for similar and perhaps what others are paying as is the case on bidding groups.
Typically it works best for social or charitable enterprises that appeal to the conscience of the buyer.
However, offline this method is quite commonly used in flea markets or by informal clothing sellers. They will have a figure in mind but will invite you to make an offer and the haggling is back and forth until there is mutual agreement.
It is a value based type pricing though the customer is given more leeway than the seller. Such a methodology can also be used by those offering services and can be more flexible on pricing. It works well at individual level rather than business between businesses.
Premium pricing is a method in which a good is sold as high as possible and may then eventually come down when competition enters the fray. It is useful in setting off the costs of being a market innovation leader and allows the business to maximise profits before others jump in.
The business that does this best would be selling unique goods and can maintain the price due to value proposition that is strong. They may also make the money in the early days then taper off in the future and this we call skimming.
An example is how expensive mobile sim cards were way back, but now they are priced unbelievably low. The initial pricing has the cost of start-up infrastructure included and eased as it was recouped.
Finally, one can use the bundling pricing methodology, knowing that everyone loves a good deal/steal. Selling several items together in a combo gives buyers the impression they are getting more value and in truth they will.
The seller would thus even out on gains from the various products and easier selling items can buoy sales of slower moving product. This works best for complimenting products and is probably the most mutually beneficial pricing method for both seller and buyer.
No business is confined to one pricing methodology, you can use one or more combined, dependent on the factors aforementioned. Take time to review your pricing model in this first quarter of the year, and locate yourself in the space that delivers the most value and supports your small business growth!
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