Pricing has a substantial and immediate effect on your business’s profitability. It signals value to your potential clients and positions you amongst your competitors. But finding your perfect price isn’t easy. Numerous factors come into play, including demand for your products/services, value and perception of value, competitiveness, and willingness by your clients to pay.

We’ll examine three methods of determining price.

Cost-based pricing

The first, most basic and essential method of pricing is to cover your costs, and add a flat figure or percentage on top. Your costs include insurances, web hosting, lease and utilities. Cost-based pricing is straightforward to figure out, but does not factor in demand, including people’s willingness to pay, or your competitors’ pricing.

Competition-based pricing

Competition-based pricing analyses existing or anticipated pricing by competitors. As price is one of the most important factors in purchasing, competition-based pricing helps position your products and services in relation to your competitors, and informs their choices.

The main disadvantage of this approach is that it ignores demand for your products and can lead to ‘price wars’ where businesses ‘race to the bottom’ to undercut each other.

Value-based pricing

Value-based pricing, also called “customer value-based pricing”, is considered by pricing experts as the best way to set prices, but it is also the trickiest to get right.

Value-based pricing uses data on people’s perceived, subjective value of the product or service to determine the final selling price. This approach seeks a deep understanding of client preferences, perceptions of value, size of different market segments, and willingness to pay.

The advantage of value-based pricing is its direct link to the paying client. The disadvantage is that the necessary data tends to be difficult to find and hard to interpret. Value-based pricing approaches may lead to high prices, especially for unique products, which can encourage new businesses to enter the market with comparable products at slightly lower prices.

Perhaps most significant, people don’t necessarily recognise a superior, innovative product or service. Clients need to be educated to understand the true value of the product or service as well as be willing to pay good money for it.

Pricing in a competitive market

Value-based pricing is especially relevant in highly competitive markets, though this might seem counter-intuitive. When you feel like your market is crowded with competitors, you tend to view your products or services as commodities, which turns into a self-fulfilling prophecy.

Almost any product or service can be differentiated from competitors through exploration and positioning, as well as a well-written sales page.

Raising your prices

Once you’ve done your research and decided on your new price, you go ahead and raise it. Simple, right? You’ll need to communicate your price rise to your clients why this is necessary, highlight any recent improvements, and reiterate the benefits of your products and service.

You may lose clients when you raise your prices but you may well make more money. In effect, you will be working less for more income.

Occasionally, you may have someone question your prices. If someone asks for a discount, you need only be brave for one second as you say no and justify your price.

Remember that it’s easier to increase your prices substantially in one go than to incrementally increase your prices over time.