Pricing strategies for small business
Pricing Strategies for small business
Your pricing strategy is so important for your business and it ultimately determines your success. The cost of your goods and services have a direct impact on the money you bring in.
Deciding how much to charge for your product or service is a challenging task. You need to factor in your own costs, the product or service’s perceived value and the going rate. Ultimately, you want to be able to charge as much as possible for each item, without overpricing yourself out business.
Avoid the Lowest Pricing Strategy
The days of the lowest price guarantee and pricing wars are over – especially for small businesses. The “big players” in the marketplace will quickly put you out of business if you try to compete on price. Their pockets are deeper and they have lower operating costs due to their sheer size. They can afford to – you can’t.
Clearly Position Your Company and Your Offering
How do you want your target market to view your business and your products? Are you trying to create an image of high quality? High value? Reliable service? Make sure your pricing is consistent with the image you are trying to project. If you are operating a high-end beauty spa – you’re not competing with the budget nail bar down the street, so your prices should be considerably higher.
Have a Good Working Understanding of Your Margins
Know how much the product or service costs you to offer before you establish a price. Do these costs remain consistent, or do they fluctuate? Restaurants that offer high-quality meat and seafood often price their meals at “market rates” as opposed to fixed rates. Calculate the fixed and variable costs associated with your product or service. You will want to work the cost of the product or service, a percentage of your overhead, and your own profit into the cost of each item.
Pay Attention to Factors Beyond Your Control
Be aware of any government or legal regulations on the price of your product or services. Here in the UK there are legal requirements based on competition law for recommended prices, there are also rules around specifying what is or isn’t included within the price, and rules on claiming that products are in a sale or on special offer. Make sure you seek out all external factors that could impact your pricing.
Price with a Purpose
Your pricing strategy should be purpose focused. What exactly are you trying to do by setting your prices at certain levels? Here are some potential reasons for pricing strategies:
- Short-term profit increase
- Long-term profit increase
- Customer generation
- Product positioning
- Revenue maximisation
- Increase margins
- Market differentiation
Wondering if you should increase your prices – take a look at our article Should I increase my prices?
Cost Plus Pricing
This is the most basic pricing strategy. Set your price at a number that includes:
- Cost of goods or services, based on a specific sales volume
- Percentage of expenses
- Profit margin (markup)
Target ROI Pricing
Set your price at a rate that will achieve a specific Return on Investment target. If you need to make £20,000 from 1,000 units – or £20 per unit – then set your price at £20 more than cost, plus expenses.
This can be a bit of an arbitrary pricing strategy, but it can also be the most profitable. Set your price based on the value or added benefit it brings to a customer. For example, if your product only costs you £40 to produce, but will save the customer £2,000 per year in energy costs, a price of £150 or £200 would not appear to be unreasonable in the eyes of the customer.
What messages are you trying to send the customer when they’re looking at your prices for your products? Do you offer the best deal? The highest value? These are reasons to choose prices that are higher or lower than the competition.
Price higher than cost. This may seem obvious, but ensure that your pricing not only covers your costs, but potential fluctuations in sales volume and in the marketplace. If you sell half of your order, will you still make a profit?
Include expenses. If you price to cover your costs, will you also be able to cover your expenses and still see a profit? Your margin needs to pay for your expenses, leaving you with something to live on, plus some working capital for the company.
Consider the ‘fair’ price. What do your consumers think is ‘fair’ for each service or product? This is impacted by your competitor’s price, your company’s image (high quality or high value, low cost), and the perceived value of your product or service.
Pricing Strategies to Increase Profit
Once you have a concrete understanding of where your business stands today in terms of profitability, minimised your operating costs, and restructured your pricing strategy, you can focus on other strategies to increase profit.
There are countless strategies and tactics that will help you to bring in more customers, get those customers to come back, and get those customers to spend more when they do.
Here is a list of ideas:
- Establish an online presence
- Sell more high margin items
- Generate more leads
- Focus on referral business
- Increase customer loyalty and repeat business
- Increase conversion rates
- Restructure your team
- Reinvent your product
- Sell your intellectual capital
If you’d like some help with your pricing strategy – that’s something we are really good at – schedule a call here