Developing a pricing strategy can be one of the most challenging tasks a business faces. Prices need to be set high enough to cover the product costs while delivering profit to the business. Yet, the price needs to remain within a range that customers are willing to pay. A flexible pricing strategy allows a business to quickly adjust pricing as necessary to accommodate a changing business climate or to overcome competitive challenges. A flexible pricing strategy also empowers customers to negotiate pricing based on their business size or buying power.
Analyze the Competition
Visit the websites and retails stores of your competitors. Make note of the prices they are selling similar products for. If your competitor's pricing is not available on their website, work with others in the industry to inquire about competitor’s pricing structure. Is the competitor the low-cost leader or known for its top-of-the line service? Understanding how your competitors position themselves in comparison with your business will help you develop your flexible pricing strategy. Keep track of your competitor's pricing patterns for future reference and monitoring throughout the year.
Determine Product Costs
To set a flexible pricing strategy, a business must first understand the product costs and related selling and overhead expenses. Combine the material costs, production, overhead and selling expenses to arrive at the cost it takes to produce and sell a product.
Determine Pricing Objectives
Setting the right flexible pricing strategy for your business has an impact on the overall revenue for the business. Use the business objectives to establish an overall profit objective for the year. The profit required by the business can help you determine the amount of markup needed to meet the profit objective.
Determine an initial markup percentage by adding operating expenses, reductions and profits together and dividing by estimated net sales and reductions. Reductions should include any inventory adjustments, employee or customer discounts. Use the markup percentage to arrive at an initial price. Run volume and profit estimates to see if the estimated price delivers the profits required by the business. Compare the price required by the business to the competition.
Use the initial product price to develop a flexible selling price range that delivers the profits required by the business yet accommodates different customer purchase situations. For instance, customers who buy products in large volumes may purchase product at a 10 percent discount off the price a customer who buys small quantities pays.
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