Tips for Creating an Effective Pricing Model
By Ali Waterman | Harkcon’s Financial Specialist
Determining what you charge for your product or service is a crucial part in any business. One way to help price products and services is by creating a pricing model. Here are three tips to creating an effective pricing model for any business.
Keep it Flexible
One of the challenges of creating a pricing model is balancing the level of detail needed for a particular product or service and the ability to reuse the model for other products and services. One mistake I made early on when developing a pricing model was trying to capture every single thing that could have a role in determining price. It made the model complex and difficult to manage. I have found that keeping the core pricing tools but removing all the pieces that were rarely used made the model flexible and easier to use across many different products and services. Create a space for the pricing manager to add the tools they need to support the core tools in the model. This way, everything you need is in the model and unnecessary tools are not distracting the model.
Create a Reference Page
When creating a repeatable pricing model, one thing that should always be included is a page for information commonly used when developing a price. For a service based business, having the staff hourly labor rates is a great example of what should be on this page. For a product based business, a list of the costs of materials can go here. This page helps the pricing manager quickly find the information they need to complete the model. Having to go search for labor rates or costs can be time consuming and lead to mistakes in pricing. Keeping the reference page up to date is an important part for making a pricing model an effective tool.
Align it with Finance Reports
Once a product or service price has been developed in the model and sold to a customer, it’s important to be able to go back to the model and see if the product or service was priced well. You want to be able to compare financial reports to the pricing model easily in order to analyze the final pricing. One way to do this is to set up a sheet that mimics a financial report in the pricing model. For example, we use Profit and Loss (P&L) statements to track the health of our projects. In our pricing model, we set up a sheet with the same P&L format to project revenue, costs and profit. This way, when a project is complete, we can go back to our pricing model and see if we overestimated direct labor, or underestimated travel costs and it is in the same format. This analysis helps the pricing manager refine their assumptions for future project pricing.
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