Coming up with the right price for a product can be quite a tricky business. It becomes more difficult in the face of intense competition or in times of economic difficulty. It is important that you know how to keep customers coming for your goods without running your business into the quicksand of price wars with competitors. There is also the risk of haemorrhaging customers as a result of your products being overpriced. It is not just about knowing what the prevailing market price is (the phrase “prevailing market price” can itself be dangerously misleading); real world market competition involves a host of other factors.
If you are uncertain about how to arrive at the right price for whatever it is that you sell, you should consider doing the following:
- Consider Your Aims
What sort of products do you want to produce and/or sell? And if you run an established business, do you aim to capture a larger share of the market, or do you want to make the most of your existing customer base? Defining your aims clearly will help you get a sense of direction. Not evaluating pricing options on the basis of your set aims will create a gap between what you want to achieve in terms of business profitability, and the actual returns at the end of the day. That gap is almost certainly going to be a negative one- a loss. It should be borne in mind that expansion may require offering discounts and longer term rice reductions if that is feasible. On the other hand, maximizing profit as your customer base grows may involve raising prices. But care should be taken here: you should avoid price increases that you cannot justify to yourself, let alone your customers.
- Determine Your Customer Base, and Know Your Customers
Higher income earners are less affected by price variations, but those on the lower end of the income spectrum tend to be more sensitive to price changes. Students are generally thrifty (for obvious reasons), so products meant for their section of the market should be moderately priced.
Macro-level information like the demographics or price-demand patterns of a market may be obtained from in-depth market research. In the end, knowing your customers on a personal level affords you the opportunity to find the nuances in taste and preferences that the sweeping generalizations of market surveys do not reveal.
- Consider Production Cost
Usually, producers would factor in the cost of inputs used in determining the final price for the product. But transport, rent, salaries, debt service and asset depreciation costs should also be included if the entrepreneur doesn’t want to end up running at a loss. The false impression that only input and transport costs are involved in price determination is perhaps the greatest cause of business failures among SMEs in Nigeria.
- Clearly Set Out Your Revenue Target
What do you envision to be your revenue from product sales? Your answer to this question will help you ascertain the quantity of your product you want to produce, as well as the possible price you could put on it. However, as has already been pointed out, projected revenue should cover all relevant costs.
- Monitor Market Trends
Of course, pricing your products way above the average for competing brands is tantamount to entrepreneurial suicide- except it surpasses its close substitutes in quality. Price trends are dictated by events and expectations of events which result in surpluses or scarcities. Knowing where the market is likely to go based on previous occurrences of a similar nature (and basic economic principles) could also help in deciding the price to be fixed for a product at a point in time.
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