What is Pricing Analysis?
Pricing analysis is the process of deciding how much to charge for your product or service. It involves figuring out all the costs associated with offering it, including production, shipping, marketing, and so on. Then you have to take into account all you know about your customers and their spending habits. Knowing what you know about your customers should be an integral part of your pricing decisions.
That’s because price plays a huge role in determining whether or not they will buy from you versus someone else. If the cost is too high they may choose to buy elsewhere even if they like what you’re selling because they think it’s too expensive. Fintalent, the hiring and collaboration platform for tier-1 Strategy and M&A Consultants has an array of Pricing Analysis Consultants and in this piece, they offer some insight into the concept of Pricing Analysis from the viewpoint of Pricing Analysts.
The price of your product or service is one of the three main factors that influence your customers’ buying decisions (the others are quality and convenience). Nowadays many new and smaller businesses opt to use flat rate pricing, which means they forego some profit in exchange for having a more predictable sales price. This is especially useful when starting out, when it’s difficult to predict exact costs and sales volumes. Flat rate pricing can also be useful for new products or services where you don’t have an established track record to rely on for accurate estimates.
So, whether you use flat rate pricing or a more traditional method, pricing analysis is critical to help you set a fair value for your product. It allows you to choose the right price that customers will actually pay.
How to Carry out a Pricing Analysis
Pricing analysis involves performing five major steps:
- Define your product
- Define your market
- Determine the costs of producing and selling it
- Determine the demand for it in your market; and
- Determine the appropriate price.
Basically, if you don’t do one of these steps in particular, then you’re probably not doing a proper price analysis and therefore will end up with an incorrect price.
Here’s a more detailed explanation of each of the five steps as elaborated on by fintalent’s Pricing Analysis Consultants:
- Define Your Product: To choose an accurate price you need to define your product in terms of what it is, how it’s delivered, and the performance levels that are associated with it.
- Define Your Market: Determine where you are in the value chain for your product or service to determine the relative positions of yourself and your competitors. Knowing this information will help you better understand why certain prices are charged by different types of companies in different industries throughout the market place. This will also help you determine what level of pricing is appropriate for your business given its position in relation to its competitors.
- Determine the Costs of Production and Selling the Product: Once you know what your costs are, you can factor them into your price. You can either do this by using an actual cost-per-unit analysis or by projecting expenses based on average sales. If you choose to use projected expenses, then you should look at the historical expenses of comparable companies in your industry trends.
- Determine the Demand for Your Product or Service: Knowing demand means that you’ll be able to price it correctly without any fear of losing customers to competitors who may be charging less for it. But don’t just think about demand in terms of numbers. Think about quality and value as well. For example, if you’re selling a $200 hair dryer, but your competitor is selling one for $100, you may still sell more because your hair dryer is higher quality.
- Determine the Appropriate Price: If you’ve done steps 1 through 4 correctly then pricing analysis will be pretty straightforward for you. It just involves taking all the information from those previous steps and figuring out how to translate it into a price that will take into account all your costs and make a profit as well.
Fintalent’s Pricing Analysis Consultant’s Tips on Saving Money Through Pricing
There’s an easy way to make sure that the price you choose doesn’t lose you money: calculate your breakeven point. This is the point on your cost curve, or breakeven line, where you make a profit on every sale. If your total sales for your product or service don’t cover your total costs, then you need to figure out how many times more in sales you need in the next quarter in order to make up for it. If that’s not clear, here’s an example:
Let’s say you’re a small business owner who decided to come up with a flat rate pricing strategy. Your business is doing fine and has been making profits consistently all year, but this past month has been kind of rough due to poor performance from one of your services.
Let’s say your sales for the month of September were $1,000. To make up for it you need to make at least $2,000 in sales in October. If you don’t, then you’ll lose money.
If your break-even point is 2,500 sales or 500 sales at a cost of $1 each, then you’re going to have to do 500 more sales this month just to cover last month’s shortfall. If that seems impossible to achieve then it might be time to lower prices or find some other way to increase demand. But since both of these options are big decisions, you should make them in small steps.
The Bottom Line
Of course, if your business is growing and selling well, then you don’t have to worry about low sales volume in a given quarter or month. In fact, this type of high demand may even help you find new customers by getting word out about your business. But if things are slow due to high customer turnover or competition from other businesses that are charging less for the same type of product or service then you’d better think hard about what price point will be most beneficial for your business’ future viability.
What you decide to do will depend on how much work it will take to get customers to pay your higher prices. Will it be worth it, or are your customers more attracted to the lower price points? The answer to this question will determine whether or not you should switch pricing strategies.
If you do decide that you should incrementally raise prices, then there are other tips and tricks for doing so successfully, including how to start slowly and carefully, how to warn customers about upcoming price changes, and how to avoid losing them altogether.
Finally, once you’ve set your prices correctly there are still other considerations that you need to make when deciding what type of pricing method is best for your product. These include whether or not you’re earning sales due to your success or because of your pricing structure.
Of the three main reasons why customers buy, one is because they believe you have a better product than your competitor’s, one is because they want the quickest possible delivery, and one is because you’ve priced your product low enough to make them feel like they are saving money compared to what buying the same thing from someone else would cost them.
So if at any point you notice that customers are buying for reasons other than these three, then you might want to reexamine how much value you’re adding to their experience by purchasing from you versus them.
After all, if one competitor is offering a better product, then it’s just a matter of time until you can’t compete with them anymore. If another competitor offers better delivery, again it’s just a matter of time until you’ll have to match them. And if your competitor can offer the same product for less money, they’re going to win most customers eventually.
Why Your Business Needs a Pricing Analysis Consultant
If you’re a business owner, or you work in sales, then pricing analysis is one of those things that’s crucial to know. It is the process of assessing the price for a product or service based on its features and its market position within the industry. Pricing analysis takes into account different factors such as supply and demand, production costs, how your product or service compares to others on the market, competitor pricing practices, and your company’s policies. Without it you’ll likely price either too high (and lose customers) or too low (and lose money by not charging enough). Business owners can avail themselves of the opportunity presented by Fintalent to hire pricing analysis consultants and experts with a wide range of experience.