Profit is a large part of why you’re in business, and it definitely is what keeps you in business. That’s why using an effective pricing strategy is so important.
Here is a look at how to set and use the right pricing strategies for your small business.
Benefits of a Pricing Strategy
When you price your goods correctly, you sell more of them, and you make a better profit. Specifically, the right pricing strategy will:
- Help you increase your market share and keep what you already have.
- Let you meet or exceed your goals for profits.
- Stay competitive by meeting or even beating the prices of your competition.
- Help you properly match what you charge with the market demand.
- Contribute to positive branding and reputation by matching customers’ image of your company.
Customer/Value Relationship
Setting the right price can be confusing. The two things you need to take into consideration are the perceived value of your product in the eyes of your customers and how much your target audience is capable of paying.
What you can charge is seldom a fixed amount. It ranges on a spectrum, influenced by how much worth you are offering to your customer. If your product or service has more benefits to a customer and offers more features than a competing product, the shopper will be willing to pay more for it.
That is easy to see when eating out. At a fast-food restaurant, you pay less for a hamburger than you do at your local gourmet sit-down restaurant.
It is also essential to get a handle on who is buying from you and the customer you want to target. What are their demographics, their income level, and how much do they typically pay for your type of product or service? They will pay more the higher their perceived value, but only within the parameters of how much discretionary income they have access to.
Competitive Environment
Next, figure out how much it takes you to produce and deliver the goods and services. You have to cover your costs plus some in order to make a profit. Base this cost on:
- Material cost
- Salaries and labor costs, including benefits
- Overhead, which can include taxes, transportation, marketing, rent, insurance and all other fixed costs
This process is complex. In addition to contributing to cover these costs, your pricing must cover all costs of the goods you are selling and importantly, contribute to company profit.
Then, find out what your competition, both in your local and online markets, are charging for the same or similar goods. Once you know the range of prices in these sales channels, you can figure out how where you want to position your price points.
Can you penetrate the market best as the high-end product in the lower end of the market? Maybe you would do better being the medium-priced product in a high-end market. Where you place yourself will have a major impact on how much you will sell.
When you figure out what your customer can pay and where you see yourself in the market, price your product slightly higher than you think you should. Not charging enough is much more common for a small business than pricing too high.
Be careful setting yourself in a market position based on pricing below the competition. Your profit margin will be low so you will need to sell a great deal to stay in business.
Strategic Pricing Alternatives
Don’t limit yourself to a one-price-fits-all strategy. There are several models available. The more pricing options you give your customers, the greater are the number who will buy.
The best approach is to get the customer to buy the basic product or service. Then add options that will increase what they ultimately spend with you. This is called tiered pricing.
To get of an idea how this works, think of buying a car. The salesperson will give you a price for the car, but then also offer financing options, for a price, and add-ons for the car. He makes considerably more money with these extras, without alienating his customer.
Figuring out the right pricing strategy takes time for research and number crunching. And the work is ongoing, subject to review on a regular basis. However, the results are a profitable bottom line.