5 Pricing Strategies That Will Work For Your Small BusinessOur economist shares a game plan to attract customers and ensure profits.
Effective pricing is one of the most crucial factors in business success. Done well, it can help your company generate maximum profits while ensuring that customers feel they are getting a good value. Are you struggling to find this strategic balance?
It is imperative that small business owners take their time to develop an effective pricing strategy, said Noah Lim, who has a doctorate degree from the Wharton School at the University of Pennsylvania. He is currently the associate professor of marketing at the Wisconsin School of Business, University of Wisconsin-Madison.
“One should account for overall marketplace demand, as well as competitor prices and the level of horizontal product differentiation in the market,” Lim said.
He advised small business owners to also consider consulting with a pricing expert to ensure their business is not leaving any money on the table.
He suggested the following five strategies to determine effective pricing for your business:
1. Don’t set your prices too low
Lim said the No. 1 mistake small business owners make is setting the price too low. It is easier to lower prices than to raise them.
“Once customers purchase at a low price, they expect to continue receiving this price and may become disgruntled after a price increase,” he said. “It is better to start with a higher price and then make subsequent price adjustments based on customer demand.”
2. Get creative with your units of sale
Rather than selling each product individually, consider bundling products together and offering a small discount on the bundle.
“By offering the discount, customers may be induced to purchase when they otherwise wouldn’t at the regular prices for the separate products,” Lim said, “and bundling two or more products together can expose customers to products they otherwise would not buy.”
3. Don’t require all products to be revenue rock stars
Sometimes it is beneficial to set a low price on one product in order to induce purchase of another, higher-margin item.
“For example,” Lim said, “the prices of razors are often set strategically low because once customers purchase the razor, they are inclined to purchase the higher-margin razor refills in the future.”
4. Differentiate your customers based on willingness to pay
Different customers often value products very differently.
“While there are laws to prohibit a business from selling the same product for different prices to different customers,” Lim said, “it is often beneficial to have two versions of a product with different price points, and then let customers decide which product to purchase.”
This can help small business owners to extract the maximum amount of profits from customers, while offering customers more fitting products.
5. Never get into a price war – everybody loses
“Once one business lowers its price, other businesses will have no choice but to respond with an even lower price, and this often spirals out of control,” Lim said.
Currently, the mobile phone industry is in a price war, and carriers are forced to offer huge discounts to retain customers. In cases like this, he said, short-term profits are vastly outweighed by long term losses, and it is best not to lower prices in the first place.
He offered a final piece of advice to small business owners considering raising or lowering prices.
“Increasing prices can be tricky, since even a small increase may lead to a large decline in purchase rate,” Lim said. “However, if an item is selling well and there are not many options for consumers to purchase alternatives elsewhere, a price increase may be merited.”
Since price increases may be disruptive to business, it is generally best to use them sparingly if possible.
“If an item is not selling well, you may be able to increase profits by dropping the price, especially if the decrease positions the product as cheaper than a well-selling alternative,” Lim said.