How to be sure your price is right
Great pricing is about foresight, not hindsight. That means there is always some risk in pricing – but these seven laws will help you reap rewards…
LAW 1: There is no right price
This might sound like a riddle – but pricing in business is never an absolute. There is no right or wrong price because every price is relative to the market. If your price is too high, your product or service will sell slowly if at all. If it is too low, you will sell out much more quickly than you would normally expect.
LAW 2: Track your sales turnover
Good pricing means a product or service takes a reasonable time to sell. As an entrepreneur, you must define and aim for the turnover that you can sustain and that brings you the cashflow you need to survive and grow. Sales data is essential for this or you will not be able to decode how effective your pricing is.
An item hanging around on your shelves should be a red flag that your price is too high. Mark it down until the item sells and use this to learn about demand in your market.
LAW 3: Know your pricing benchmark
Cash Converters is in the second-hand business so our key pricing benchmark is the price of our stock compared to new goods. That does not just mean the recommended retail price.
We recognise our competitors are both other businesses in our sector and other businesses that could cannibalise trade from us – for example, a chain retailer who does a good special on TVs. So look broadly when setting your pricing benchmark.
LAW 4: Understand that prices must be flexible
One price does not fit all. Heavy competition means accepting lower prices. But where customers would have to travel a couple of hundred kilometres to buy a product or source a service, they might be prepared to pay extra for the convenience of avoiding that journey.
A price can change between being right or wrong depending on the particular time and place.
LAW 5: Know your customer’s values
When you are building your base of customers, learn what you can about them to guide you in good pricing judgements. Know what proportion of your customers value getting the lowest possible price, for instance.
If you don’t, they may still buy but suffer from buyer’s remorse and not return. Or your customer might value their time so highly that they will not waste it shopping around, whether in stores or online.
Related: How To Find The Pricing Sweet Spot
LAW 6: Research your position
When I started the first SA Cash Converters store in Parow, we had to get all our competitor information from the advertising inserts in the newspapers. Today the internet makes this process much easier, just as electronic pricing allows you to adjust your price very quickly. But the basic principle still applies that you need to know where your pricing falls in the range of prices in your sector.
If your price is in the higher section of this range, you must ensure that you justify a premium price by offering a consistent buying experience that your customer enjoys.
LAW 7: Keep your costing sharp
If you don’t know what it costs you to produce and sell your goods or services, you cannot track whether you are successfully achieving the margin that you might need to build a sustainable business.
It helps to be familiar with acceptable margins in your sector. Be sure that you include all your costs in your costing calculation – otherwise you could find yourself wondering why you are not reaching your profit projections.