Many people consider pricing to be an art, not a science.
There are are two fundamentally different approaches to working out a price for your product or service.
The first starts at the bottom and works up. You start by working out your overall fixed costs, then your variable costs, add on your desired profit, then divided by how many units you think your can sell. What you’re left with is your unit price.
For most, this is usually the easiest way to determine how much to charge, but many would argue the least effective way to determine price. This is because you are perceiving your product or service as a simple, single cost-based transaction.
The second approach is to work out what your target market would be willing to pay to have you solve their problem. As the name implies, with a value-based pricing model you don’t compete on price with your competitors, you compete on the value you provide. This approach means that you could maintain much higher profit margins and avoid ‘race to the bottom’ price wars. Of course, this approach is dependant on your ability to consistently add value and make a real difference in people’s lives.
This is really a mind-set thing. How do you perceive your business? If you compete on price then your business is based on transactions. This is inherently dangerous as your customers will simply move to your competitors if they offer better prices. If on the other hand you solve problems and add value, you have a relationship based business, which is much more resistant to pricing pressure.
So before you attach a price to your product or service, stop and think about what problem your customer is solving with this purchase. With this mindset, you can better understand the value you provide, and the most appropriate pricing strategy.
