Cost vs Value: How To Price Your Products For Maximum Profit
When it comes to selling products and services, businesses want to make as much profit as they can while still offering customers the best deal possible. Two of the most common methods to decide a price are cost based and value based. Cost based pricing decides the worth of the product by competitive market prices, while value based pricing is based on how much the product or service is perceived to be worth. There are pros and cons to both methods. Here is more in-depth information to help you decide which is best for your company.
Cost based pricing is the more traditional method of the two. One of the reasons it has remained popular is because it so simple to use. How it works is by adding a fixed margin to the cost of production. Finding the exact selling point starts with the base price, which is determined by the fixed cost to the business. Then, find the floor price (the lowest you can go without losing money) and the ceiling price (the highest price the market will allow). Usually, your selling point will be somewhere between the floor price and ceiling price.
With this method comes some obvious pros. First of all, it is very simple to calculate. It does not take much market research, and it remains consistent. This means that businesses can simply add a margin on top of their calculated costs, and they will usually get a positive rate of return. You do not have to have a deep knowledge of the market or competitors when pricing this way. Cost based pricing is an easy way for small businesses or start up companies to begin learning how to price their products.
While this might sound appealing because of its simplicity, there are some major cons. By using this method, you could be undercharging or overcharging customers. It also does not take into account how much your customers are willing to pay for the product. They do not care how much it cost to make, they only care about your selling price vs their need or want. Cost based pricing discourages you from keeping up with market research. By only basing your markup off of how much money you paid, it is easy to forget to keep track of market trends. Bottom line, cost based pricing is not the best method for the majority of companies.
Value based pricing is another popular method. As the name suggests, value based pricing is based on how much the item is perceived to be worth, rather than a fixed margin. Although it takes more work to determine the value of a product and how much you can sell it for, it typically yields better results.
A good first step to take when using this method is to create a buyer persona. A buyer persona is the ideal customer for your market. To find your ideal buyer persona, start out broad and narrow it down as needed. Take into account things such as age, gender, location, income, buying motivations. The next step is to conduct research to find out how to best market to your ideal customer. You can send short surveys to your customers to get feedback from their perspective. This also helps you gauge what they think is a good balance between quality and price. If you think your prices are too high, try lowering them. Alternatively, if you think you can make more profit by raising prices, make it clear to customers why your product is worth more.
After completing your research, you can set a price for your product or service. Although this method may seem more in-depth and complicated than cost based pricing, it will better serve you and your customers in the end. Some examples of companies that have excelled in value based marketing are Rolex, Apple, and Coach. All of these companies have set a price, explained to consumers why their product adds value to your life, and are now viewed as status symbols.
Although either method will allow you to price and sell products, value based tends to work to get you and your customers the best price possible. Make sure to keep in communication with your customers and create value for them, and your business will thrive. And no matter which method you choose, BMT Micro can provide you with a safe, reliable payment platform.