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HOW TO DEFINE YOUR PRICING STRATEGY: MARKET PRICING

This month’s article is the second in our pricing strategy series, and in this installment, we will look at market pricing. It is important to note that this article is for managers of small businesses, self-employed professionals and those looking for advice on how to set their prices.

Market pricing is one of the simplest pricing strategies to use; in a given market, what are the prices of people or business doing the same or similar things as you. However, there is more to this. Why? Because not everyone is really the same.

For example, let’s take corporate accounting services. In one of your markets, there are five options;

  1. - A professional who has not completed his/her university degree, who is not recognized by his professional order and cannot sign financial statements: he/she charges $30 per hour;
  2. - A professional fresh out of university, who is certified by his/her professional order and is in the process of building his/her customer base: he/she charges $45 an hour;
  3. - Another professional just out of university but working in a large firm: he/she charges $150 an hour;
  4. - Another professional who is self-employed with 25 years of experience: he/she charges $75 an hour
  5. - One last professional who is part of a small firm of four partners: he/she charges $85 an hour.

You want to position yourself in this market. You are self-employed, you have 10 years of experience and you are starting your business (with experience gained in a professional firm). How much should you charge?

An important aspect in the market pricing strategy is the notion of what the market is willing to pay. In our example, the market seems to be able to support a wide range of prices. So this aspect of the analysis is done for us by the players that are already in place and enjoying success with their respective strategies (though it is important to validate the concept of success for each). In our example, according to what the market supports, you would be between $45 and $75 an hour. But where exactly?

Here are other factors to consider:

- Where are you in the development of your business? 
- Sale volume needed to break even;
- The financial reserve you have to support your business development;
- Your ability to differentiate yourself from other competitors in the market.

Let's go a little further in our analysis.

You’re starting out and you want to build your customer base? A lower price is one way to "steal" market share. So unless you're well known in the market, the price variable can be used as a differentiation factor between you and the other options. But be careful, you have to stay within a certain limit. In our example, you shouldn’t fall below $45 an hour because you would void the "value" of your certification with your professional order.

What is the level of sales necessary to achieve your break-even point? Here, the cost-based pricing elements should be considered to answer that question.  You need too many sales to break even? Your costs are too high compared to those of your competitors?  You might have to consider another market with a higher price range or review your costs.

If you have the funds to allow you to be more patient, than you can set your prices more toward the high end of the price range. Good customers will soon be coming through the door as long as your communication strategy is sound and well executed. 

Finally, the ability to differentiate yourself from your competitors is also essential. The actions that need to be taken here fall into the personal branding concept.  In Economics, there is an important maxim that says, all things being equal, the thing that will influence the purchasing decision of the consumers will be the price. To get out of this, it is essential that you are able to highlight your competitive edge and market yourself accordingly.

Do you have questions or comments? Feel free to contact me. 

Stéphane Elmaleh-Riel, B.Ed., MBA
Marketing consultant