Pricing For Success
A question i often like to ask craft vendors is how they arrive at their quoted prices. The responses are varied, but usually have one thing in common-vagueness. The reason, i suspect, is that the vendor does not have a concrete pricing strategy in place, making it a largely arbitrary process.
Identifying and developing a pricing strategy for creative products and services is often misunderstood and the mere mention will instantaneously elicit feelings of doubt and anxiety.
Understanding and applying any one of the various pricing strategies can mean the difference between success and failure. In the first of a two part series, i will take you through the various strategies.
Let me start off by differentiating two concepts that often cause some confusion: price and cost. According to Wiki.answers.com, price is defined as what you sell something for, cost is what you paid for it or what it cost to produce it.
There are various pricing strategies, but i have listed the most appropriate in regard to craft enterprises.
1. Cost plus pricing– The most common of pricing strategies, it involves calculating your cost price and then adding a mark up or profit margin. Keeping record of all your expenditure as well as time spent on the project is key in this strategy. So long as you have your costs calculated correctly and have accurately predicted your sales volume, you will always be operating at a profit.
2. Value based pricing– The setting of price based on the benefits the product or service provides the consumer. Enterprises that offer highly unique products and services are well positioned to adapt this strategy. It is usually the most profitable form of pricing.
3. Market based pricing– Also known as a competition-based strategy, prices are determined by what similar products in the market are selling for. The price is then set higher or lower than market price.
4. Psychological pricing– A pricing strategy that relies on making prices appear more attractive to consumers. It is based on the notion that humans are not perfectly rational and that certain prices are more attractive than others. There are 5 basic models in this strategy
a) Premium pricing or “skimming”- The practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers. The practice is intended to exploit the notion that expensive items are of exceptional quality.
b) Odd pricing- This is a strategy of setting prices in odd numbers just below an even price, for example pricing an item at Kshs 1995 rather than the even price of Kshs 2000. This gives the impression that goods are marked at the lowest possible price.
c) Multiple pricing- Pricing items in bundles, such as three for Kshs 500 rather than Kshs 200 per item. This strategy creates a sense of value and can help boost sales volume by encouraging the purchase of multiple items.
d) Promotional pricing- Also known as “on sale” pricing, this strategy temporarily lowers prices so as to increase consumer demand.
e) Price lining pricing- A strategy that uses a limited number of prices for all products. This model is best exemplified in the Shop 100 stores where everything costs Kshs 100. The underlying rationale is that these amounts are seen as suitable price points for a whole range of products.
Look out for part 2 of Pricing For Success, where i will use a case study to demonstrate how you can apply the cost plus strategy.
Look out for part 2 of Pricing For Success, where i will use a case study to demonstrate how you can apply the cost plus strategy.
Sources: ehow.com, entrepreneur.com, wikipedia.org, organizerightnow.wordpress.com, 123rf.com