How To Price Your Products For Profit
How you price your products says a lot about your brand positioning, product quality and long-term strategy. It’s more than picking a number that sounds good: you need to consider all the factors to fuel your profitability. Accounting expert Yemi Ajala broke down three main pricing structures in our masterclass, Fundamentals Of Business Finance. Let’s explore them with their pros and cons right here.
1. Value-based pricing: charge for what you’re worth
Value-based pricing is all about perception: you price your product or service based on what your target market perceives that it’s worth. This approach works well for niche businesses where there aren’t many comparables, allowing you to charge a premium because you’re offering something special or rare.
Pros
The pros? You’ve got control. This model lets you set a higher price if your brand, product, or service stands out from the crowd. Think about premium products: luxury brands do this well by presenting themselves as high-end with elevated packaging, branding, and customer experiences. With value-based pricing, you’re also more likely to build a loyal customer base, as buyers are paying for an experience or prestige, not just a product.
Cons
You need deep market research to truly understand what your customers value. This isn’t just about slapping a price tag on something and hoping for the best. It involves a lot of testing, feedback, and fine-tuning to get it right. And when competition catches up (which they inevitably will), you’ll need to stay ahead of the game to keep your pricing premium.
2. Competitor-based pricing: keeping an eye on the market
Competitor-based pricing is straightforward: you look at what your rivals are charging and set your prices accordingly. This approach is easy to implement, and the risks are usually low. If your competitors are successfully selling at a certain price, it gives you a solid benchmark.
Pros
This method is quick and cost-effective. You don’t need to spend too much time figuring out your own numbers or doing complex market research. Simply look at what’s already working in your industry and follow suit. It’s a tried-and-tested method that works well, especially when combined with other pricing strategies.
Cons
The downside is that you’re not truly standing out. If you’re just matching competitors' prices without considering your own value, you could be leaving money on the table. Plus, competitor pricing doesn’t account for your unique costs. They might have different economies of scale or supplier deals that allow them to operate with smaller margins. If you blindly copy their pricing without understanding these factors, you could undercut your own profitability.
3. Cost-plus pricing: cover your costs and add a little extra
Cost-plus pricing is the most common method, especially for small businesses. It’s as simple as it sounds: you calculate your costs and add a markup, which could be a percentage or a flat rate. It’s easy to calculate, and it ensures you’re covering your expenses and making a profit.
Pros
This approach is sustainable in the sense that as long as your costs are covered, your business will survive. It also allows you to test new products or services easily. Just figure out the costs of producing or offering the service, add your margin, and you’re ready to go. It’s a straightforward, no-nonsense way to set prices.
Cons
Cost-plus pricing has its limitations. It doesn’t consider market demand or the value of your product. Focusing solely on costs might mean you miss out on opportunities to charge more for higher quality or unique offerings. In some markets, pricing too close to your costs can make your product seem cheap or undervalued compared to competitors. Additionally, it’s tricky to apply this method when you have shared costs across multiple products or services.
Choosing the Right Pricing Strategy
Each pricing strategy has its advantages and drawbacks. Value-based pricing is great for niche markets but requires deep customer insights. Competitor-based pricing offers an easy benchmark but can limit your ability to stand out or maximise profit. Cost-plus pricing ensures you cover your costs but doesn’t always reflect the true value of your product.
The key is to align your pricing strategy with your business goals and market position. If you’re offering something unique and high-end, don’t be afraid to go premium with value-based pricing. If you’re in a competitive market with well-known players, competitor-based pricing might help you stay relevant. And if you’re just starting out and need to keep things simple, cost-plus pricing can be your go-to until you’re ready to evolve.
Ultimately, your pricing should reflect your brand, your costs, and—most importantly—what your customers are willing to pay.
