By Yinka Kolawole, with agency reports

One of the secrets to business success is knowing how to set the best prices for your products. If you set your prices too high, you may scare away customers and favour your competition. If your prices are too low, you may be losing profits and running your business at a loss.

The best price for your product or service is one that is low enough to attract customers but high enough to make you a good profit.

Can entrepreneurs set prices that attract customers and guarantees good profits? It is possible, but you’ll have to know the strategies to apply and in what markets to apply them.

Value to customers

One of the most effective strategies you can use is to price your product based on value. The value of a product means different things to different people. The more value a person places on a product or service, the higher the price they’re likely to pay for it. You may not be willing to pay N1,000 for a bottle of water, because there is water everywhere around you. But if you’re lost in the middle of the Sahara desert with no water to drink for five days, if somebody shows up with a bottle of water and offered to sell it at N2,000, you will most likely go for it.

This clearly shows how consumers react to price when the product holds a lot of value for them. This value could be based on several factors such as emotions, survival, greed, scarcity, status etc.  The higher the value customers place in your product or service, the higher the price they’re likely to pay. It’s a natural law and a fact of human behaviour.

Know your customer

Analyse your market and study your potential customers when you’re setting prices for your products or services. You can set any prices you want, but if your target customers cannot afford it, your business won’t sell anything.  By studying your target customers’ behaviour, likes, dislikes, preferences, tastes, lifestyle, income levels etc, you will gain a lot of insight that will help you to set the right prices for your products or services.

There are three main types of customer groups you should always consider when youfre setting prices. Price-sensitive customers – price is the most important factor that affects their buying decision. Convenience-centered consumers – Those who value convenience more than everything else. Quality-conscious customers – They will pay anything to get the best quality of a product or service. The more you know about your target customers, the better you can set a price that will appeal to them. Putting your customer first is a strategy that always works.

Cover your costs

To survive and succeed in business, you need to make profit. Profit means that youfre selling your products or services at a price that is higher than the amount it cost you to make the product or deliver the service. Before you set a price for your product, you need to be very sure that it covers your costs and will make you a profit.

Apart from the cost of making a product, you also need to know how many products you need to sell in order to turn a profit. Many entrepreneurs just set a price that looks good without first checking if the price covers their costs and will be profitable. If you set a price that favours your customers, but is bad for your business, it will only be a matter of time before you won’t have a business anymore. You must consider your direct and indirect costs. If your cost is more than your price, it’ll only be a matter of time before you run out of business.

Competition

Everybody who does business knows that price is one of the effective ways of attracting customers to your product or service. This is why you need to always consider the pricing of your competitors. Consumers are smart; they always want a fair price, and will always compare your price against your competition. If a competitor’s product is cheaper and there’s no major difference in the value of the products, you could lose customers to your competition.

Business is a race. You need to constantly make sure that your product or service is competitively priced, especially if your products and services are similar to those offered by the competition.

Demand

More than 99 percent of consumers only buy products and services they need or desire. But there are times when people are ’forced’ to need and desire certain products and services. In such periods, the demand for these products and services skyrocket beyond the supply in the market. When such events occur, it’s usually an opportunity to raise prices.

For example, during festive seasons like Christmas, New Year and other religious and national celebrations, the demand for food products automatically increases. Because more people than usual will want to buy foods like rice, chicken, drinks etc. to celebrate with their families. Also, before the Ebola outbreak in West Africa, not many people knew about or had used a ‘hand sanitizer’ before.

The demand and price of this gel, which is usually applied on the hands to kill germs, skyrocketed. The huge unprecedented demand for this product made it a highly-priced product overnight. To get the best price for product or service, it’s always a good strategy to target periods of high market demand.

By targeting times of scarcity or excess demand, you could increase your pricing as a strategy to make more profits. These opportunities are not available throughout the year so it makes perfect sense to exploit it the most you can.

Culled from Smallstarter.com