Effective Pricing Strategies

There it is, Growth Tactics Newsletter #28.

Have you ever priced your products or services and then felt like you were either giving away the farm or charging an arm and a leg? Pricing can feel like a guessing game, especially for small business owners. But fear not because we're here to help you get a handle on pricing strategies that actually work.

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Alright, let's get started!

💸 Identify your costs

To make sure you're aware of all the costs associated with producing and delivering your product or service, consider all the expenses, both direct and indirect, that are necessary for your business to operate.

Direct costs are those that are directly associated with your product or service, such as materials, labor, and shipping.

Indirect costs are those that are not directly tied to your product or service but still contribute to the overall cost structure of your business, such as rent, utilities, and administrative salaries.

Find out more about direct and indirect costs here.

Additionally, you should consider variable and fixed costs, such as raw materials and rent, respectively, and overhead costs, such as office supplies, marketing, and legal fees.

To calculate your costs, you can use a cost of goods sold (COGS) approach, which involves determining the cost of producing or acquiring the goods or services sold and then subtracting the cost of goods sold from revenue to calculate gross profit. If you want to find out more about COGS, make sure you read this article from Investopedia.

You can also conduct a break-even analysis to determine the minimum amount of revenue you need to cover all your costs.

🎯 Pricing objectives

As a small business owner, having a clear pricing objective that aligns with your goals and market conditions is important. There are three main pricing objectives that small businesses can pursue

Maximizing profits

In order to do this, you should consider using pricing strategies such as cost-plus pricing or value-based pricing to set prices that generate the highest possible profit margin. With cost-plus pricing, you add a markup to the cost of producing a product or service to determine the selling price. With value-based pricing, you determine the price based on the perceived value of your product or service to your customers.

Market share increase

For this, use strategies such as penetration pricing or promotional pricing to set prices that are lower than your competitors and capture a larger portion of the market. Penetration pricing involves setting low prices initially to gain a foothold in the market, while promotional pricing involves offering temporary discounts or incentives to attract customers.

Penetrate new markets

Pricing strategies such as skimming pricing or bundling are great for setting competitive and attractive prices to customers in a new market or segment. Skimming pricing involves setting high prices initially to take advantage of early adopters. On the other hand, bundling involves offering multiple products or services together at a discounted price.

⚔️ Analyze your competitors

One important step in setting competitive and attractive prices for your products or services is to research and analyze your competitors' pricing strategies. To do this, start by gathering information on your competitors' products or services, including their features, benefits, and unique selling points. Read more

Compare this information to your own products or services to identify any areas where you can differentiate yourself. You can also research your competitors' pricing strategies online or in person.

Visit their websites or stores, look at their promotional materials, or talk to their customers or employees to get a better sense of how they're pricing their products or services.

💳 Value proposition

One important factor to consider when setting prices is your value proposition. Your value proposition is what sets your product or service apart from your competitors and highlights the unique benefits and value it provides to your customers.

By considering your value proposition, you can determine how much your product or service is worth to your customers and set a price that reflects that value. To communicate your value proposition to customers, you should focus on the benefits that your product or service provides, rather than just the features.

Highlight how your product or service solves a problem or fulfills a need for your customers and use this as a basis for setting prices. You can also use marketing and advertising to communicate your value proposition and differentiate yourself from competitors.

If you want to find out how to create a value proposition, Hubbspot has a great article related to this. Check it out here.

📰 What's new 📰

Instagram is killing live shopping in March, will focus on ads instead

“As Meta gears up for its “year of efficiency,” the company announced today it’s exiting the livestream shopping business on Instagram, following a similar shutdown on Facebook. Starting on March 16, 2023, Instagram users will no longer be able to tag products while livestreaming — a capability that has been broadly available to U.S. businesses and creators since 2020. ” Read the entire article here

Instagram just got an update that gives you more control over what you see in your feed

“The new settings include Quiet mode, which allows users to set a customized schedule to silence Instagram notifications and auto-respond to direct messages (DMs). The app will automatically prompt teens to enable quiet mode when they spend a “specific amount of time” browsing the app at night."(CNBC)

📰 An interesting tweet 📰

Conclusion

You now have the power to set prices that will make your customers and your bank account happy. Remember to identify your costs, set clear pricing objectives, analyze your competitors, and consider your value proposition when setting prices. And, of course, don't forget to use a magic crystal ball to predict the market's future! Just kidding, that last part might not be necessary.

See you next time!