The Four Steps to Setting Your Pricing Structure
As a Business Strategist and Entrepreneur Coach I enjoy helping my clients master their money and pricing is just one of the areas we focus on when it comes to mastering money.
Pricing is one of the most challenging aspects of running a business. There’s no definitive right or wrong answer when it comes to setting your prices, but there are some tried and tested techniques that can help you hit the mark. For example, if you’re struggling to figure out how much to charge for your services or product, you might find it helpful to think about pricing in terms of pricing structure. Pricing structure is a method that breaks down pricing into four distinct buckets: price points, cost-based pricing, value-based pricing, and hybrid pricing. Each of these methods has its benefits and drawbacks. Some are more useful than others when it comes to setting the correct price for your business. This blog explains everything you need to know about setting up your pricing structure as a small business owner.
What is a Pricing Structure?
A pricing structure is a method for structuring your pricing. It’s a way of breaking down your pricing into distinct buckets based on the type of buyer you’re selling to. A pricing structure helps you to set your pricing by giving you a framework for understanding the cost of your products or services and the value you’re providing to customers. It can also help you to identify whether your pricing is too high, or if it’s in line with what the market is willing to pay for your products or services.
A pricing structure is also known as a pricing grid, pricing plan, or pricing model.
To create your pricing structure, you’ll need to do the following: Determine who your ideal customer is Determine what kind of pricing structure is best for your business Find the right combination of price points and cost-based pricing factors that works for your business
Price points are exactly what they sound like: they’re points at which you’ve priced your products or services at a specific price. For example, if you sell a bag of coffee beans for $10, then this is your first price point. If you sell a bag of coffee beans for $100, then this is your second price point. If you sell a bag of coffee beans for $9,999,999, then this is your third price point.
Price points are the simplest way to create your pricing structure. You can use as many price points as you think are necessary for your business. You can also name your price points whatever you like.
For example, if you’re selling a training course for $500, you might name your first price point “Entry Level.” If you’re selling the same product for $4,999, you might name your second price point “Executive Level.”
Price points are great for businesses that are just getting started with their pricing. You can use price points to test different price points to see what your customers are willing to pay. You can also use price points to segment your customers into different groups. This can be helpful when it comes to customer retention.
Cost-Based Pricing
Cost-based pricing is all about understanding how much it costs to produce your product or service and then pricing your products or services accordingly. The idea behind cost-based pricing is that you take the total cost of running your business (including overhead and salary costs) and then divide it by the number of units you plan on producing in a year. Where cost-based pricing can be useful is when you’re selling a product or service with a limited market. For example, if you’re selling a product that only a few thousand people in the world need and can only be used in one particular situation, it can be difficult to charge a high price. Cost-based pricing is a great way to help you set your prices in these cases. Simply take the costs of running your business and then divide it by the number of products or services you plan on selling.
Value-Based Pricing
Value-based pricing is all about understanding what your customers are willing to pay for your products or services and then pricing your products or services accordingly. The idea behind value-based pricing is that you take the value that your customers receive from your products or services and then price your products or services according to that value.
Value-based pricing is great for services that deliver a lot of value to their customers. It can be a little trickier to use with physical products, but it can still be done.
For example, if you sell a training course that teaches people how to use a particular piece of software, the value that that software delivers to its users is immeasurable. It’s something that people use on a daily basis. Because of this, you could reasonably expect your customers to be willing to pay a lot of money for that software.
Hybrid Pricing
Hybrid pricing is a combination of cost-based pricing and value-based pricing. The idea behind hybrid pricing is that you take the cost of producing your product or service and then add a premium to it based on the value that it provides your customers.
Hybrid pricing is great for products that have a limited market as well as services. It takes the best of both worlds from cost-based pricing and value-based pricing to give you a price point that is tailored to your business.
For example, if you sell a product that only a few thousand people in the world need and can only be used in one particular situation, you might want to use hybrid pricing. You might want to use cost-based pricing to determine the cost of producing each unit and then add on a premium based on the value it provides your customers.
Summing up
Pricing is one of the most challenging aspects of running a business. There’s no definitive right or wrong answer when it comes to setting your prices, but there are some tried and tested techniques that can help you hit the mark. Pricing structure is a method that breaks down pricing into four distinct buckets: price points, cost-based pricing, value-based pricing, and hybrid pricing. Each of these methods has its benefits and drawbacks. Some are more useful than others when it comes to setting the correct price for your business.
As a Business Strategist and Entrepreneur Coach I enjoy helping my clients master their money and pricing is just one of the areas we focus on when it comes to mastering money. If you feel like you need assistance in reviewing, restructuring, and gaining clarity on the areas you might be leaving money on the table then apply for a free strategy call and we can explore if working together in your business is the perfect fit.
Danielle Throckmorton is a business strategist, coach, speaker and luxury retreat host. A two-time NextGen Under 30 award winner, Danielle now offers business strategy and coaching services to female entrepreneurs through 1:1 mentoring, workshops and retreats.