8 Tips for Finding the Right Balance Between Profit Margins and Competitive Pricing

8 Tips for Finding the Right Balance Between Profit Margins and Competitive Pricing
Tips for Finding the Right Balance Between Profit Margins and Competitive Pricing

One of the major decisions you’ll always come back to, no matter what type of business you run, is pricing. Entrepreneurs will always want to achieve the delicate balance between a price that appeals to customers and a price that helps the company meet its revenue targets. 

But the so-called “Goldilocks” or “just-right” zone for pricing is often not just a simple equation that entails the cost of goods plus the company’s margins. Other considerations, such as the customer’s perceived value, will definitely come into play.

Luxury branded goods are a great example of this phenomenon. They can oftentimes command high prices not only because of their premium craftsmanship but also their perceived exclusivity.

To that end, here are some pricing tips for entrepreneurs heading small- and medium-sized enterprises (SMEs) or startups. Strike the right balance between meeting your profit margins and keeping your prices competitive by doing the following:

1. Conduct a Cost Analysis

Your pricing strategy begins with understanding your costs. To set a good base price, you need to know the ins and outs of your expenses—from production and materials to overhead and marketing.

A comprehensive cost analysis sets the foundation for your pricing strategy and ensures that you cover your costs while making a profit. Don’t make any drastic changes to your pricing without doing a cost analysis first.

2. Perform a Competitive Analysis

To set the right price, you must also be aware of what your competitors are doing. Analyze their pricing strategies and how they mean to offer value to your shared customer base.

This competitive analysis will give you insight into your market positioning and help you identify any pricing gaps you can use to your advantage.

3. Determine Your Value Proposition

Remember that your value proposition is what makes you an appealing alternative to your competitors and that a strong value proposition can justify a higher price. Identify what makes your product or service stand out, and emphasize that for your customers in your pricing strategy.
There are various ways that you can distinguish your brand from others through your value proposition. One is to promise cutting-edge customer service whenever customers visit your store, especially when it comes to the issue of checkout. Offer customers multiple payment options, for example by facilitating smooth and secure QR code payment processes.

In the Philippines, SMEs and startups can partner with Maya Business, the country’s leading fintech or financial technology company, to provide efficient online and offline payment solutions to customers. One of these solutions is the Maya QR payment that a customer can simply scan to pay for items or services received.

The payment QR code is a versatile cashless payment solution that will work for your physical store, social media marketplaces, and e-commerce business all at the same time. Customers will be able to pay through various QR Ph participating banks or e-wallet apps.

4. Weigh In on the Different Pricing Strategies You Can Use

There are various pricing strategies you can employ for your business, including the following:
  • Cost-plus pricing: This approach is pretty straightforward and simply involves adding a markup to the cost of producing a product or service. That said, you have to determine how much of a markup suffices.
  • Value-based pricing: This pricing strategy focuses on what customers are willing to pay based on their perceived value of the product. Businesses often view this as the ideal pricing strategy because it drives customer loyalty.
  • Competitive pricing: This pricing strategy involves setting prices in line with or slightly below competitors' prices. The goal of this approach is to stay ahead in a competitive market.
  • Dynamic pricing: For businesses such as hotels and riding apps, dynamic pricing is necessary to reflect the changing demand or customer behavior. This ensures that profits are maximized throughout the year.
  • Penetration pricing: Penetration pricing involves setting a lower initial price to quickly gain market share and attract customers.
Consider each pricing strategy carefully, and choose a strategy that aligns with your business objectives and market positioning.

5. Set Your Margin Goals

As with any business strategy, you should define your objectives for your margins. These will serve as your guides for setting your pricing decisions.
To properly set your margin goals, you should determine the level of profitability you want to achieve. Different business types may have varying margin goals, so ensure your pricing aligns with your financial objectives.

6. Conduct Price Testing

Whatever pricing strategies you choose to follow, keep in mind that pricing is not static. Using A/B testing, your business will be better disposed to find that sweet spot in your pricing strategy. 

You can do this by experimenting with different price points and assessing how they impact sales and profitability. With data-driven decisions, you’re more likely to achieve that high level of price optimization.

7. Assess Customer Feedback

When it comes to pricing, your customers’ feedback is incredibly valuable. Listen to what they have to say, and collect their feedback using surveys or social media to gauge their perceptions of your pricing. Their insights may be able to lead to timely adjustments, which in turn will increase your earning potential.

8. Adjust Your Pricing as Needed

Market conditions change, as do consumer preferences. As such, be flexible in your pricing approach. When you notice significant shifts in the market or changes in the trends that govern your customer behavior, be ready to adjust your prices in accordance with these.

Above all, expect pricing to be an ongoing process for your business. It’s both a science and an art that’s dependent on hard data and subjective emotion. Use these tips to arrive at prices that are both profitable and appealing to your customers, and increase your chances of growing as opposed to staying in the red.
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