How to Develop a Pricing Strategy for Your Small BusinessEvery business, no matter how small, can follow a few guidelines to optimize pricing — and maximize profits.
To say pricing your products is tricky is something of an understatement. The risks are straight out of Business 101: Price yourself too high, and you artificially suppress demand. Price too low, and you reduce your topline sales potential.
Larger firms can turn to market research agencies to help engineer a pricing strategy, but that’s probably not an option for you — it’s too expensive to perform the sort of study a Fortune 500 company might commission to assess price points in the industry. But that doesn’t mean you are without options.
These approaches can help you make sure your products or services are optimally priced.
Compare yourself to the competition
You can learn a lot by doing a little research on your own — by seeing what your competition is charging.
“There isn’t an exact science to pricing. Don’t make it too complicated. Just gather some numbers to compare and contrast, and take your best shot,” said Jean Walker, COO of Regear Marketing.
If what your business offers is simply better, take that into account. “Compare your product and service offerings in a subjective manner,” said Joshua Schall, a business strategy consultant. “If you have a differentiation or reason you believe you could get a premium for your product or service, then I would note that.”
Also, advised Schall, “Look at the saturation in your local or regional market. If saturation is high, then you need to decide if you will be a low cost leader to gain market share, use average pricing to market to the same customer base, or price at a luxury and go after a different section of the market.”
Don’t undersell yourself
Many experts agree there’s a tendency to price too timidly; many small business owners are reluctant to value themselves properly, and set prices too low. Walker suggests you “start with higher pricing and see how your consumers react.” You can always lower prices if necessary, but it’s much more painful to try raising prices that aren’t covering your costs.
Evan Berglund, Senior Partner at the Gonzberg Agency agrees. “In coming up with your objectives, don’t just focus on covering your costs, which is a common mistake. Instead, focus on what the market will bear. Look at aligning your prices with the needs and demands of your customer, responding to the moves and countermoves of your competitors and improving your product’s perception in the eyes of your target audience.”
Don’t lose sight of your margin
Being aware of the competition, especially when you’re operating in a crowded market, is common sense. But taking your pricing cues from the competition can be dangerous. Stephen Ondich, CEO of Commercial Forest Products, has firsthand experience setting prices. “We set our pricing levels based on the margins we want. If we require a 50 percent margin, and our cost is $1, we’re pricing it at $2. It’s a simple unemotional process that has served us well.”
Ondich explains that the alternative is fraught with risk. Suppose you’re a sandwich shop, and a major chain runs a special. If you match or even beat that price, many people will still go to the chain anyway — and the customers you did retain take advantage of your discount, eliminating your margin. “What if you just left pricing at $8? It may not have cost you that many sales, so you’re discounting your product unnecessarily,” said Ondich.
Close the loop with your customers
How do you know if your pricing is optimal? You have two intrinsic feedback loops, noted Schall. “After you come up with an effective pricing model, your first feedback loop is your rate of customer acquisition. The second feedback loop is the retention rate of those customers.”
And that’s not all. There’s no reason not to query your customers directly. You can ask patrons to take a short survey after making a purchase — the key is to keep it short and ask only the most essential questions.
Walker is a big fan of gathering direct feedback. “One of those questions should be: ‘Do you feel that you received your money’s worth for this product/service? Please explain.’ Whatever the reply is, take it seriously,” she said.