For example, if a product costs $100 to make and a company's target margin is 15%, then the product will sell for $115.Ĭost-plus prices still need to fall within the WTP range, but they're not chosen based specifically on what the customer is willing to pay. Instead of basing prices on what the customer is willing to pay, businesses set prices by determining the cost of production and their ideal profit margin. Cost-plus pricingĪ very similar method to value-based pricing is cost-plus pricing. Takeaway: Charge what you can without turning off the customer to your product. You can do this by incorporating additional value into your product or service to increase the customer's willingness to pay the new price. If the new price surpasses this range, you'll need to explore avenues to expand the WTP range. If you need to make a price adjustment, you can do so as long as the new price falls within the WTP range. You might think of it as the "default" pricing method since it consists of finding what the customer is willing to pay (the WTP price), making sure it's higher than the cost of production, and setting your price somewhere in between. The first pricing method is probably the one you're most familiar with: value-based pricing.
#Explain value based pricing plus
Here, we'll look at 15 of the most common pricing methods, plus how and when to use them. Your product probably isn't going to switch from being a luxury to a bargain and back again, but you can (and, in some cases, should) switch up the pricing method you're using to better meet your market demands.
Pricing methods are sort of like plays in a playbook. Once you have that figured out, you'll move on to choosing a pricing method, which is the how of your pricing strategy. Your core pricing strategy has to do with what you're selling: a luxury, a bargain, or just a good product for a good price. But you'll spend a lot less time and money starting with a pricing analysis than you will taking a complete shot in the dark. Sure, you could just trial-and-error a bunch of prices until you find the price that maximizes profit without deterring potential customers-and there will probably still be some of that even after you choose a pricing strategy for your business. The goal is to set a price that will entice customers to buy, but that isn't so low that you're not making a profit. What is a pricing strategy?Ī pricing strategy is a plan for setting the best price for your products or services. Here's a guide to creating a pricing strategy that will keep your profits moving up and to the right. For your business to be sustainable, you'll need a pricing strategy that generates adequate income while also being attractive to customers.
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