Pricing must be one of the biggest struggles for small business owners; get it wrong and it can be such a complex area to fix. Business sustainability, reputation and profits rely on getting it right.
This is a complex area that requires more than just looking at your product cost. Your pricing should account for many factors, including marketing, desirability, time and expenses, as well as hard costs to buy and supply.
Winning customers whilst generating sufficient profits are the joys of running your own business. So let’s have a look at how you can get it right.
Defining Pricing Strategy
How much are your targeted customers willing to pay? The public perception of your product niche and your likely purchaser’s wealth demographics are just some of the considerations. Alongside this is the cost of the product that you must factor in.
Now is definitely time to look at your competition. You should assess not just their pricing but how much they sell, how well their brand is known and how they market their product or services. Undercutting competition can win market share. However, this may not be a long term sustainable solution if your business runs aground trying to maintain it.
Identify your fixed costs, those you will incur whether you make a sale or not. The closer control you have over your outgoings, the more chance you have to gain a price advantage over the competition.
Economy – aim at those searching for a bargain. Par back all costs and aim for sales volume to bring in the profits. This is difficult for small businesses to achieve; it demands scale in supply and customer volumes, and margins are small, meaning you need to achieve high sales volumes quickly to be sustainable.
Premium – The other end of the spectrum. Sell your goods and services for significantly more than others. Foster the exclusivity of your brand; profit margins can be significant and you can see a profit with fewer sales. You must reinforce and communicate luxury from packaging to the experience.
Competitor – This can certainly help build consumer trust; following the ‘Never knowingly Undersold’ tag of leading retail John Lewis Partnership sees you price under your significant competitors. Customers know they will not buy cheaper elsewhere. However, you are left open to your competitors’ whims. It can impact your profit margins and remove an element of your pricing control.
Psychology – Emotional factors come into play for consumers deciding what to buy. For instance, pricing that ends in .99 creates the impression of cheaper than it is. Conversely, rounded pricing often adopted by luxury brands can fool others into thinking it. You can attract different types of customers by your choice of one or the other.
Bundle – A great way to clear inventory or to attract those looking for added value is to create product bundles at a lower cost than the individual item sum.
Captive – Sell the base product cheap and the required consumables for a higher price mark up. This gives you a captive audience committed to your brand and a cash flow that is more regulated as buyers return to repurchase the consumables.
The type of product or service you offer may seem to dictate a particular strategy. but there are other challenges a business faces to keep pricing competitive and timely that should not be ignored. Looking at the bigger, long-term picture is essential to ensuring the price is right.