A pricing conundrum
Monday, October 22, 2007/
Setting prices for your products or services may seem to be a mystery – it’s not, but you may need practical magic.
A pricing conundrum
While the papers are full of news about Visy and Amcor’s cosy cartel ferreted out by the ACCC, you may have missed the key question of how do those of us in home based business develop a pricing strategy and set prices?
It’s not easy, because as a home business you may feel isolated from your competitors and your cost structures will be different.
The pricing strategy you adopt depends on what you are trying to do in the market, as pricing is simply signalling to the market. Do you want to build sales, obtain market entry, capture market share or maximise profits?
It is vital to have your own independent strategy that determines the relationship between your price and quality positioning.
Cost basis would be a minimum sufficient position; cost-plus is great if the market will bear this pricing, as it covers all your fixed and variable costs per unit of sales with extra margin built in, but that could mean that you are out of business in a hurry if you price your home business out of the market.
Are you going to add a premium for the goods and services you are providing to build market share through superior offers, or are you planning to offer a “loss leader” to create new customers and expand the size of the market?
This is where your suburban solicitor becomes critical. A good pricing strategy needs to be competitive based upon a good appreciation of what your competitors are doing.
Do not sit down with a few competitors to reach an “understanding” that gives everyone a little bit of the advantage. This not prudent; it may even become a criminal offence if you are small enough to justify a prosecution!
Instead you need to engage in a little market research and a lot of experimental marketing to establish your own pricing strategy.
Investigate the territory and independently determine the break-even point for your offer. Find out the price point that will get the stock off your shelf on a consistent basis at a reasonable profit.
Ask your locked-in customers what offers they have been receiving and what increased volume they could give you in return for a fair price.
Then make an assessment of your positioning in the market; the quality of your offer compared to what else is in the market. If you under-cut your competitors, they may lower their prices to combat your strategy, leading to a nasty price war (and wishful thinking about the previous stable pricing regime).
Flexibility, adaptiveness and a measure of responsibility are the ingredients to your positioning strategy that will ensure that the price is right. It must cover the costs of market entry; time to build up brand equity in the new territory; and the added bonus and distribution costs associated with carving out a competitive position in that market.
At the same time, loyalty discounts for long-term customers can help generate long-term sales and maintain cash flow, effectively locking out competitors and building a platform for your expansion into the new market. As long as this is a genuine competitive price point and not a predatory attack on smaller home business operators, this effectively defends your home base.
In the end, pricing is the art of relating the price of your product, service or experience to the value that is offered to your new customer. If your offer is special, your unique selling proposition will act as the justification for charging a premium price at entry.
If there are dozens of “me-toos” in the market, it will be necessary to offer a discounted price point to get customers of competitors to make the shift.
Dr Jane Shelton not only runs a business from home but is doing business research into people working from home. She is managing director of Marshall Place Associates, Melbourne’s independent think tank, and CEO (honourary) for ‘Life. Be in it.’ International. Shelton has a Doctorate in Business Administration at the Australian Graduate School of Entrepreneurship (AGSE) at Swinburne University of Technology after a Master of Arts in Public Policy at Melbourne University and a Bachelor of Business in banking and finance at Monash University.
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