Is your business charging the right prices?

Consumers need products and services. Businesses charge to provide them. That’s what keeps the economy going. But as any good shopper knows, prices can vary from business to business. And pricing is often about more than manufacturing and operational costs and margins. What goes into figuring out how much to charge? There are several common methods for pricing strategies. Discover how pricing strategies differ and which ones make the most sense for your business.

Competitive pricing

One traditional way businesses have set their price points is by doing a little research to see what the competition is charging. But even within that pricing strategy, there are different avenues to take.

Some business owners use the rationale that if Jim’s coffee shop down the street charges $2 for a small coffee and you set your price at $1.85, you will attract more customers because you are saving them money. And more customers mean more sales and revenue.

Others think that if they come in at a higher price point, customers may see it as a premium product. These business owners are willing to market to a smaller audience who may be willing to spend the extra money, with the hopes they will make up the revenue difference with higher quality (and profit margins) over quantity.

Either way, your business strategy and how you position your company in the marketplace should align with your pricing strategy and vice versa. If your main market is college students who want a fast fix in between classes and are on a fixed budget, then it may make more sense to offer fewer options at lower price points.

However, if you’re located next to an office complex with higher-earning professionals who come in with colleagues during breaks or lunch, you may be able to offer a more robust menu and an overall experience that warrants higher prices. Maybe you have bakery items, free refills, places to sit, background music or a free Wi-Fi connection.

While it may make sense to use competition-based pricing as a guideline, keep in mind that a lot of other factors often go into pricing. You may want to test different price points to see how you do.

Cost-plus pricing

Cost-plus pricing, also called markup pricing, follows a simple formula. It’s calculated by adding your costs of production (the amount of money you have to pay to produce, manufacture, package, ship and market each item) and your markup (how much money you want to make on each item).

For instance, if it costs you $1 to make a cup of coffee — including the cost of coffee beans, sugar, milk, cups, lids and operating costs like electricity and water — and you want to make a 50% profit, you would price each cup of coffee at $1.50.

Pretty simple, right? Yes and no. Many times, this price is based on current volume pricing of ingredients and supplies. That means the more you order, the cheaper the cost per piece. But if your sales volume suddenly goes down, it makes sense that you would need fewer supplies. So you may no longer qualify for that volume discount, and your cost per item may go up — cutting into your business’s profit margins.

Overall price increases may also cut into your margins. This is the dilemma for many businesses during inflationary times. To stay in business, businesses face tough decisions. Should they raise their prices? Reduce the sizes of their items? Purchase cheaper ingredients and supplies? Let go of help? Or some combination of all these things?

Demand-based pricing

This type of pricing strategy takes into account consumer demand, which can fluctuate based on the perceived value of a product at any given time. Supply often affects this type of pricing. When it’s harder to get something, everyone wants it and is often willing to pay more for it.

Remember during the height of the pandemic when things like cleaning supplies, protective equipment, medicines and even toilet paper were hard to find? Consumers were paying top dollar to get their hands on these things, even if they didn’t need them right away. They were stocking up in fear of being without in the future.

Demand-based pricing is also common for services, such as snow removal during a big storm or dog sitters during peak travel season. The thinking is that the more valuable a product or service is to a customer, the more you can charge for it.

The bottom line

A number of factors go into pricing strategies for any business. And these factors can change on a dime. That’s why the best pricing strategy may be a combination of multiple strategies that you evaluate often and adjust as needed. Whatever pricing method you use, it’s important to combine that with smart cash flow strategies. For products that can help you operate and grow your business, speak with a Chase business banker today.