How do I position myself in the market through my pricing?
You need to decide which end of the pricing scale you fit. Are you in the business of piling things high and selling them cheap, or do you provide exclusive and expensive products or services? Or perhaps you’re somewhere in-between?
There’s no one right approach – it depends on the nature of your business and the products or services you sell. But whatever approach you take, you need to understand the mechanics of your pricing strategy. For example, if you source a product for £1 and price it at £1.50 you need to sell three times as many to make the same profit as selling it for £4.50.
If you’re providing a premium product or service you can aim for a very high profit margin, but you must ensure that your quality meets, or exceeds customers’ expectations.
Setting prices to charge more or less the same as your competitors
Isn’t the easiest way to set my pricing to charge more or less the same as my competitors? On the face of it, simply matching what your competitors charge can seem to be the easiest thing to do. But care should be taken. Take a look at the example shown in the panels below.
Lower overheads
Ryan knows what his competitor, Gwen, charges per hour for carpentry services, so he decides to match her price.
Ryan and Gwen’s businesses are very similar. They both work for approximately the same number of days each year, for similar types of customers. They have roughly the same sort of equipment, use comparable volumes of materials, and do approximately the same number of miles. Despite this, Gwen’s business is more profitable than Ryan’s, and he’s finding it a struggle. How can this be?
The reason is that Gwen has lower overheads. She owns her tools outright, whereas Ryan has bought his with a loan he pays off in monthly instalments. Similarly, Gwen owns her van, while Ryan has a lease purchase agreement for which he makes regular payments. Gwen uses her home garage as a workshop, whereas Ryan rents business premises.
Profit margin
The two businesses have different levels of profit: Ryan’s has more costs.
To make the same profit margin as Gwen, he’s going to need to reduce his costs, increase the number of days he works, put up his prices, or do all of these things.
Putting up his prices now is unlikely to go down well with his customers, unless he can persuade them that he’s offering something extra.
Don’t copy your competitor’s prices unless you’re sure you can afford to. Just matching your competitors’ prices means you might not be charging as much as you could. If you bring more value to your customers, such as providing additional benefits, higher quality, or better reliability, they may well be prepared to pay a higher price.