Maximising profits with the right pricing policy

Pricing policy is an important factor for small and medium-sized enterprises. With a balanced pricing policy, businesses can sustainably increase their turnover.

von Emily Weber
erstellt am 28.09.2021

Many small and medium-sized enterprises have focused on cost savings in their day-to-day business. But at some point, even with this measure, one is at the limit. Often, new ideas for increasing profits are not even considered. For example, pricing policy. Most small business owners, however, have not yet recognised the potential of customer-dependent pricing. With a focussed pricing policy, it is possible for every company to maximise its profit in the long term. It is important to know the customers' willingness to pay. An important initial guide can be the clientele of the respective products. A luxury watch has a different clientele than a bread roll at the bakery. In this article, we will deal with the topic of price structure, also called "pricing".

Index

What is pricing policy?

How do I set the right price?

Creating an attractive pricing policy

Stumbling blocks in pricing policy

Summary

What is pricing policy?

Pricing policy and pricing are part of a company's marketing mix. And here it doesn't matter whether a company is a small specialist shop in the village or a global conglomerate with several branches. Pricing policy is primarily about determining which price is best for your product. The price is influenced or determined by

the cost price,
the competition,
as well as the strategy and positioning of your business.

The pricing policy is particularly important for the customers, because the price is an important reference point for the respective purchase decision. Better quality is usually associated with a higher price. A common example of this is luxury goods. On the other hand, a low price is often branded as "cheap". So it is important to find the right price for your products.

How to set the right price

Every service or product should cover its costs. Therefore, the cost price is the foundation of the price. Once you have calculated the cost price of your products, you can add the profit margin to it to determine your selling price. The cost of goods sold is the long-term price floor. As long as your company adheres to this lower limit, no losses will be made because the fixed costs as well as the variable costs are covered with it.

In addition to the lower price limit, the competition is also important for optimal pricing. Compare your calculated price with your competitors. With this step you check whether your sales price is realistic. The Internet is helpful for researching the competition. You have already defined your positioning in your business strategy. Now you can check whether the price you have set fits into your strategy. Do you want to offer cheaper or more expensive products? Which target audience do you want to address (wealth, age, profession)? If necessary, you need to adjust your pricing or business strategy.

Create an attractive pricing policy

With the price floor and the competitive research, you have set the sales price. With the other instruments of the pricing policy, it is now a matter of creating additional incentives to buy your products:

Price models

With the price models, you define the period or interval in which your customers pay for your products. Do you sell services in a monthly subscription? Will your offer only be bought once? Psychological pricing is also important to define here. Even if we often round up prices, an amount of 9.95 seems more attractive than a round number of 10.00. Such a small difference of 0.05 can also make the difference whether a product is bought or not. Especially with cheaper products (low-price strategy), such a psychological limit is important. With luxury goods, price psychology is less relevant.

Price strategy

In pricing strategy, we distinguish between fluctuating prices and the fixed price strategy. Companies with a fixed-price strategy offer products at permanently low prices, for example discounters. In this way, they can reduce fluctuations in demand and prices remain consistent. Most companies expose themselves to fluctuating price demand and use various incentive systems:

Promotions
- with discounts
- Sales
trial subscriptions
Volume discounts on unit prices (graduated prices, the more that is bought the cheaper it becomes).
Sweepstakes

Exclusivity

Another popular tool in marketing is to make a product, offer or service exclusive. This is done by artificially limiting the time or access. By reducing a product to a certain time or number, you psychologically create an additional incentive to buy. This gives customers a feeling of scarcity and makes them want the offer even more. For example, you can reduce a sale to one week or the first 20 customers receive a free trial subscription.

Financing models

Depending on how expensive a product or offer is, special forms of financing can be attractive for customers. The best-known models are "leasing" or "instalment payments". With such financing models, the products are usually financed by banks or pre-financed by your company. The "instalment payment" model in particular can additionally boost sales. According to the motto "Treat yourself to luxury today, but pay for it later". In addition, longer payment periods, attractive financing options and discounts can have a positive effect on the purchase decision of your products. But beware, interesting financing offers always have a negative impact on liquidity. Therefore, careful preparation is particularly important.

Stumbling blocks in pricing policy

As with all business issues, the following stumbling blocks can occur with pricing policy:

The price is not aligned with the market, too high or too low a price. In both cases, sales are lost.
Prices are not differentiated. For example, the same prices are applied to an annual or monthly subscription.
Prices are lowered instead of increasing product value. This results in poor value for money.
Leaving the pricing policy to others.
Using price to compensate for weaknesses in product, staff and strategy.

Summary

Especially for small and medium-sized enterprises, blockchain technology can prove to be an opportunity. Thanks to decentralised storage, complicated business processes can be automated without additional third-party providers. Thus, fees can be saved and costs reduced. Blockchain is also promising in terms of security: the different computers of the network participants ensure that sensitive data is additionally encrypted. This also promotes the "sharing economy". In the future, resources will no longer be bundled in one place, but will be available to several companies and institutions at the same time. In other words, the internet will become more democratic with blockchain technology. At the moment, however, integrating this technology into small and medium-sized enterprises is still far too expensive and the data volume due to decentralised storage is very high. As soon as blockchain is no longer inert and becomes profitable, however, this could change quickly.