Is the price factor the profit factor in your business?
Determining a price for a product that maximizes revenue is an ongoing process that challenges the best business planners. The first step in developing a pricing strategy is to collect data about the buying habits of your customers. You can use that data to calculate a product’s price elasticity of demand, which is a measure of how price changes affect consumers’ willingness to buy a product.
Pricing strategy plays a critical role in fleshing out a company’s budget. Pricing is used to project sales revenue and calculate profit and loss. In addition, some pricing strategy tasks, such as collecting pricing data and positioning products in new markets, can be expensive. Budgets need to account for these costs as required line items.
The first step in a pricing strategy is to collect data about how changing prices affect buying habits. You can initially sell your product in a limited number of markets to get a feel for how your customers react to the product. Sell your test product at slightly different prices in each market to determine the price that produces the most revenue.
Another way to collect pricing data is to compare historical sales data about similar products your company sells. Or you can purchase historical sales data about similar products sold by competitors.
You can learn about buying habits by asking your customers directly. Conduct surveys to determine your customers’ sensitivity to a product’s price changes.
With a product’s pricing data in hand, you can calculate price elasticity of demand, which is a ratio that measures how price variations affect customer purchases. In mathematical terms, price elasticity of demand is calculated as the percent change in product demand divided by the percent change in product price:
Price Elasticity of Demand = % change in demand / % change in price