Decoding Pricing Strategies

What really is in a price…?

In the intricate world of business, pricing stands as a pivotal pillar, dictating profitability, market positioning, and customer perception. Product pricing can be a minefield for most brands, specifically young businesses creating a new product or product offering.

What really is in your price? How do you come up with a price that’s reflective of the value or provenance of your product?

Before we dive in, just a quick question on what is your business trying to achieve with your pricing strategy?

A.    Recoup current expensive supply chain costs

B.    Provide a lifeline for the business to grow sustainability

C.    Develop a pricing model that reflects the value/provenance of the product offering

Image: Emmy Kasbit

The best pricing strategy provides should make all the above available to your business, and here are the first key steps to look into when developing your pricing.

1.     The current and forecasted cost of production

2.     Your operating costs

3.     A Healthy Margin

4.     Brand Image & Perception

1.  Production Costs (Current and Forecasted)

There is no other way to begin to build your pricing without the current outgoings to create the product itself. No matter how you create your products, this should have a cost attached to it. If you do this yourself, how much should this be billed hourly or daily. If you’re provided a nice broken down invoice by your outsourced supplier these costs should be broken down.

The Cost of Production encapsulates the expenses incurred in manufacturing a product or delivering a service. It encompasses raw materials, labour, overhead costs, and operational expenses. Understanding these components provides clarity on the minimum price threshold necessary to ensure your business is profitable.

Consider your raw materials and every component that forms the foundation of the final product. Assess the quality, availability, and fluctuating market prices of these materials. If the price increases annually – you want to factor this in.

Every product requires human hands (often aided by machines) to make a physical product. What is the cost breakdown for this? How long does it take to create a specific product and how much does the labour cost for that period of time (even if it’s a measly 20 minutes). Consider how much of your wage bill this product is proportionately.

Image: AAKS

2. Operational Costs

In the intricate dance of business management, operational costs stand as a fundamental rhythm, influencing profitability, efficiency, and strategic decision-making. Understanding and covering these costs within your pricing strategy ensures that at a medium level of sales and productivity your business should be able to pay those reoccurring bills.

Operational costs encompass the array of expenses incurred in day-to-day business activities, spanning personnel, facilities, technology, and beyond. Consider what other personnel expenses you incur as a business, these could be training, employee benefits, or health insurance. You want to factor in a fraction of these expenses in your product price to generate income for the business.

Do the same for facility costs such as rent, utilities, maintenance of equipment (yes servicing your machines!) and any other infrastructural costs the business will be taking on in the next year. Any other technology subscriptions on investments the business may have ongoing should also be factored into your price.

Operational costs should consider everything that your business uses to remain in business. You want to be able to have money in the pot to cover these once you start selling your product.  

Image: Oriré

3. Margins

Your margins are the space between cost and profit that enable your business grow at a sustainable pace. Margins should always consider market factors and the current economy. A margin too small and you will fail to be profitable, a margin too wide and you may miss the sweet spot of capturing your client’s attention and their cash.

It really is a delicate balance between revenue generation and cost containment. Margins may vary depending on spending power of your customer and where you source your materials from. Several businesses consider this like building a sandwich and ensuring all margins are proportionate. It may be helpful to work backwards using perception pricing to decide what your margin is. Margins can also vary per product depending on demand and how profitable a single style may be to the rest of your collection.

When calculating your margins remember a wholesale margin (if you plan to sell direct to retailers) and a retail margin that won’t undercut your stockists buying in larger quantities. The ultimate measure of profitability will account for all expenses including taxes and interest.

Image: Marrakshi Life

4. Brand Perception

Is anyone really going to buy at this price?

Imagine a luxury bag selling for the price of a high street bag, would you be suspicious? Would you question the authenticity, the material used and the quality of the bag if it was bought for way less than expected?

The only reason why you would question it is the underlying expectation of value attached to the luxury brand you associate with the bag being sold at the high street price. Pricing your product to meet the perception of customers and the outside world may be the most difficult aspect of coming up with a price.

Consider what value you have communicated to your customer about your brand in general. Do they value the process? Is there an expectation of quality or provenance or even the price? How much would your customer expect to pay for your product? Most importantly what is the cost of the value you are delivering in this product and what is the price that is attached to this value.

Luxury brands have been successful because of the meticulous approach to delivery quality and expertise for decades. The largest names enjoy the highest price tags because they can boast of well recognised mastery within their field. With this in mind, how much can you realistically charge for your product?

Pricing is one of the most contentious things small businesses struggle with. As the landscape of the market continues to change and spending power is completely different to what it was a year ago, how are you pricing your new collections and what makes it reactive to current ongoings as well as weatherproof for the next 6 months.

To discuss pricing in greater depth and how to achieve a price that is competitive and also attractive to your customer, book an introductory call with our team using the link below.