Profitable Pricing

How much should you charge for your products or services? It's a tough question, and one that has a huge impact on your business. Get it wrong, and you'll either end up losing money or leaving money on the table.

Profitable Pricing

Building the right tech stack is key

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How to choose the right tech stack for your company?

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What to consider when choosing the right tech stack?

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What are the most relevant factors to consider?

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What tech stack do we use at Techly X?

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Profitable Pricing

Pricing is a complex and misunderstood component of the 4ps. The reason pricing is so difficult to understand is because it interacts with every other element of the mix. For example, a price change will have an impact on all the different aspects of the mix, including product, place, and promotion. To set the right price, companies need to understand what their customer is willing to pay, the perceived value of the product, the cost of the product, and the desired profit. Pricing also has a psychological effect on consumers. In general, people are willing to pay more for a product when they perceive it to be of higher quality. However, many other factors can influence how much people are willing to pay for a product, including perceived scarcity and social status. Thus, pricing is a complex and tricky business. Companies need to be aware of all the different factors that can influence pricing to set the right price for their products.

This article will cover some basic knowledge and definition of key terms as it was developed to work in conjunction with our "Profitable Pricing" Tool. 

Pricing methodologies

If you have ever priced a product, you know it isn't easy to get it right. Likewise, many startups fail to get this aspect of their business right, and many small businesses continuously leave money on the table so that they can be more profitable. Hopefully, this article will help you make the most of your pricing. 

These are essential factors to consider when introducing a new product or service or changing the price of an existing one. Pricing can be a complex process, and businesses can use several different pricing strategies. The most important thing is to find a pricing strategy that meets the needs of the company and the customers. Other businesses will have different objectives when it comes to pricing, and there is no one-size-fits-all answer. The most important thing is ensuring the pricing strategy is aligned with the overall business strategy. Pricing strategies can be broadly classified into four types: 


1. Cost-based pricing: This approach looks at the costs incurred to produce a product or deliver a service and determines a price based on adding a profit margin. The selling price is not necessarily linked to perceived value or market conditions.

2. Value-based pricing: This approach considers what customers are willing to pay for a product or service based on the perceived value. It takes into account market conditions and what competitors are charging, but ultimately the price is set based on what the customer is willing to pay.

3. Competition-based pricing: This approach looks at what competitors are charging for similar products or services and sets the price based on that. The goal is to be competitive in the market and attract customers.

4. Market-based pricing: This approach looks at what the market will bear, or what customers are willing to pay, and sets the price accordingly. It takes into account market conditions and what competitors are charging, but ultimately the price is determined by what the market will support.


If you know how much revenue you can generate at each price point, you can find the price point that will generate the most revenue and make your product or service profitable. 

But how do you know what customers will pay? 

How do you know customers' demand for your product or service? 

Demand 

Generally, as the price of a product or service increases, demand for it usually goes down and vice versa. This is because, as the price of a product or service increases, the opportunity cost of buying it also goes up. The opportunity cost is the value of the next best alternative use of money. In other words, if the price of a product goes up, the customer can buy a similar product at a lower price from another supplier or buy a different product altogether. 

Quantity 

The quantity of a product or service that a customer is willing to buy at a given price is known as the demand for that product. In the real world, demand is not a single number but a range of quantities a customer would be willing to buy at a given price. For example, a customer might be willing to buy two product units at $10 per unit or three at $ 8 per unit.

Profit 

There are a few different ways to increase profit. One way is to lower costs. This can be done by finding cheaper suppliers, negotiating lower prices, or improving production processes. Another way is to increase revenue. This can be done by selling more units, rising prices, or finding new markets. Companies need to track and analyse their financial data to find the right balance between costs and revenue. This data can identify areas where costs can be lowered or increased revenue. By making informed decisions, companies can improve their profitability.

Profit 

Then determine how much profit your product or service will generate. It is helpful to test multiple pricing scenarios both behind closed doors and in the real world with customers. 

Here are two key calculations. 

Profit = Revenue – Costs 

Revenue

There are a few different ways to increase revenue. The most common way is to increase the price per unit. Another way to increase revenue is to increase the total number of units sold. Finally, you can increase revenue by selling more expensive products. There are a few different ways to increase revenue. The most common way is to increase the price per unit. Another way to increase revenue is to increase the total number of units sold. Finally, you can increase revenue by selling more products with a higher profit margin.

Revenue = Price * Quantity 

So, if you want to generate $30,000 in profit, and your widget costs $10 to produce, you'll need to sell 3,000 at $100 each. 

But what if you can't sell all 3,000 widgets at $100? This is where your three different price points come in. If you only sell 2,000 widgets at $100, you'll need to sell 1,000 widgets at $150 to make up the difference. Or you could sell 500 devices at $200. 

Now that you know how to calculate profit, you can start thinking about the pricing strategy for your product or service. The point is, you have options. You can adjust your prices to hit your desired profit mark, no matter how many widgets you sell. Of course, this all assumes that your costs remain the same. If your prices go up, you'll need to sell even more widgets to make the same profit. And if your costs go down, you can sell fewer widgets and still make the same profit.

Price Sensitivity

One major factor that determines how price-sensitive consumers are is, of course, their income. The lower their income, the more price-sensitive they tend to be. This is because consumers with a low income have less money to spend, so they are more likely to be influenced by changes in price. However, income is not the only factor that affects how price-sensitive consumers are. 

Another critical factor is the type of product. 

Some products, such as necessities, are less price-sensitive than others which are discretionary spending or luxuries. This is because consumers are more likely to continue buying essentials even if the price rises, but they are less likely to continue buying luxuries if the price rises. 

In addition, the degree to which consumers are price-sensitive also varies depending on the market conditions. For example, during a recession, when consumers are generally more worried about money, they tend to be more price-sensitive than during periods of economic growth. Considering the impacts of inflation on petrol prices, people who commute or travel for work will have to keep purchasing petrol if they want to keep their jobs. However, the same people may have to switch the brand of butter from Lurpack to something else. 

To sum up, three main factors affect how price-sensitive consumers are: income, product type, and market conditions.

Customer Demand 

In microeconomics, customer demand is important in determining the prices of goods and services. The demand curve shows the relationship between price and quantity demanded. The higher the price, the lower the quantity demanded. The demand curve slows downward because people are willing to buy less as prices increase. In a perfectly competitive market, the demand curve is the same as the individual customer's marginal utility curve. The demand curve facing a monopolist differs from the market demand curve because the monopolist is the only firm in the market. The monopolist has the power to set prices and is not a price taker like firms in a perfectly competitive market. 

Price ceilings and price floors can also change the demand curve. A price ceiling is the maximum price that can be charged for a good. Price floors are minimum prices that can be charged for a good. Price ceilings and price floors can be seen as government intervention in the market. Demand is an important concept in microeconomics and can be used to explain a variety of economic phenomena.


Scenario Planning 

What-if scenarios are powerful. They let you test assumptions and see the impact on your business before you commit to a plan. Use our Pricing Profitability tool to generate different what-if scenarios and find the optimal price for your product.

Fixed Costs

There are many types of fixed costs that a company may incur. These can include rent, utilities, insurance, and office supplies. Fixed costs are often called sunk costs because they have already been incurred and cannot be changed. A company's fixed costs will not change in the short term, even if production levels increase or decrease. In the long-term, however, fixed costs may change if a company expands its operations or launches a new product. While fixed costs are important to consider when making business decisions, they should not be the only factor. 

Cost Structures

Almost all businesses have some degree of fixed and variable costs. The mix of the costs varies from company to company and within industries. For example, a company that manufactures an inexpensive product with a broad customer base will have more variable costs than one that manufactures a complex product for a specialised market. There are a few key points to remember about variable and fixed costs: -Variable costs increase or decrease as output changes, while fixed costs remain the same. -Total cost is composed of both variable and fixed costs. -The marginal cost is the variable cost of producing one more unit. Variable costs are essential to businesses because they help managers understand the relationships between production and costs. With this information, businesses can make informed decisions about pricing, output, and other factors that affect the bottom line.

When it comes to pricing your product or service, it's essential first to understand what your competitors are doing. By looking at the prices of similar products or services, you can get a good sense of the going rate and price your offering accordingly. Of course, it's not just about matching or undercutting the competition. You also need to consider the quality of your product or service and ensure that your price reflects the value you're offering. You can price accordingly if you're confident that you've got a superior offering. There's no easy answer when it comes to pricing, but by researching and understanding the market, you can come up with a competitive price that will help you succeed.

VALUE 

Value is important to customers because they want to feel like they are getting a good deal. They want to feel like they are getting more benefits than they are paying for. Value is also significant to businesses because they want to charge a high price to cover their costs and make a profit but low enough to attract customers. 

There are a few ways to create value for customers. One way is to offer a low price. This could be done by reducing the cost of production or by providing a discount. 

Another way to create value is to offer a high-quality product. This could be done by using better materials, offering a better warranty, or providing better customer service. 

Creating value for customers is important, but businesses also need to make sure they are making a profit.

Many companies try to create value for their customers by providing low prices and a high-quality products. 

Analysing Your Results 

1. How prices in each zone might affect demand 

2. Whether your prices might take business away from competitors 

3. What message do your prices send to customers? 

Different prices send different messages to customers. For example, a high price might convey quality, while a low price might convey value. However, be careful not to underprice your product, as this could send the message that your product is not worth very much. Your price also needs to be competitive. If your prices are too high, customers will go to your competitors. If your prices are too low, you might not make enough profit to sustain your business. Finding the right price is essential to ensuring the success of your business. 

As you think about setting your prices, consider the following:

1. How much does it cost to produce your product or service

2. What your competitors are charging for similar products or services 

3. What message do you want to send to your customers? 

Consider all of these factors when setting your prices, and be sure to review your prices regularly to ensure that they are still meeting your needs.