As with everything, it does not take rocket science to get this right, however one slip, could seriously damage your bottom line. The three factors, equally weighted are as follows:
The value that your customers put on your product and service.
Will you make a profit?
What your competitors charge for the same or equivalent
So how do we define customer value?
Value is what a purchaser gets when they make use of your product or service. It is the figure that they put on, their new capabilities. Ones that you have delivered to him through ownership of what you sell.
Value is not always quantified in monetary terms. A golfer may go to a professional, get three lessons, and knock 10 off their handicap - so what is that worth to them? If they had previously spent $5,000 on lessons and still been awful, it could be worth an awful lot.
The most important consideration is that the buyer must feel that they got "good value" from their purchase.
However this good value must not be sold at a loss!
Given, you are in business to make a profit, it is important that you do not sell everything at a loss. It is fine to have loss leaders and indeed, offer freebies, to encourage new clients, or to reward loyal customers. However you business must be profitable, or else you will not have one.
To understand whether you are making profit from a product or group of products, you should factor in all fixed and variable costs. Then look at how many you will sell, and ensure it is worth your while selling at that price.
But what if it's good for you and your customer, but your competitor is cheaper!
First and foremost, check that what they are selling is identical to what you are selling. If it is, all you will do is create a market that your competitor will clean up on.
The good news is that in 99.99% of cases, your products or services are not identical. This is where creating your unique value proposition is vital. This needs to distinguish you as being the best solution in your chosen target market or niche.
It is important also to realize that the best solution may also not be the cheapest. Let's go back to the golf pro. He charges $60 a lesson for his services; his competitor charges $30 a lesson. But if what you want is rapid improvement, and this guy has testimonials to prove what he has done, by spending $180 with him, to get 10 shots off your round of golf, could save you thousands, that you could have spent with the $30 guy.
The bottom line is that your pricing must take into account the three key considerations; providing the better value than your competitors, at a profitable price.
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