Picking the right pricing strategy is one of the most important and consequential decisions any small business makes. So many things are downstream from pricing — the makeup of your customer base, your marketing strategy, your profit margins, as well as your ability to expand into new markets and withstand competition.
The right pricing strategy could make you tops in your market, bringing in record profits and growing at a healthy rate. The wrong pricing strategy could tank the business entirely, sending you back to reluctantly working for someone else. So how do you determine the right pricing strategy for your small business?
Start With The Manufacturing Cost
Figure out how much it costs to actually make your product and how much it’s going to cost to get it to your potential customers. Then, through market research (which we’ll touch on more below), figure out what kind of budget your customers have for your product. Resolving those two numbers will give you a rough pricing spectrum for your product — from your absolute minimum break-even price to your top-of-the-line premium price.
Check Out The Competition
Your industry competitors are your biggest rivals. You’ll be competing with them for market share, for innovations, and for eyeballs. But at the same time, they can be a valuable source of intelligence. Look at how your competitors price their offerings, and try to reverse engineer their thought process. What kind of profit margin are they bringing in? How does their pricing strategy evolve and adapt to the seasons? How are they targeting customers?
Setting a lower price than your competitors is also a time-tested way to expand into a new market. Just don’t set your price too low, for too long, or you could set off a price war.
Talk to The Market
Any time you have a question, it’s best to go to the experts. If you want to know if moving expenses are tax deductible, you talk to a tax accountant. On the other hand, if you want to know how much customers will pay for your product or service — well, you ask the customer. This could mean convening focus groups, or something as simple as creating some free online polls.
Market research will give you a well-defined idea of how much your customers will pay for your service, what kind of value they expect at that price, how they want to pay (subscription, pay per use, etc.), and how much they already pay for similar goods or services.
The facts you glean from market research will give you a solid, reality-based foundation for future moves, and can be valuable for other segments of the business, from your marketing department to your sales plan.
Figure Out How To Stand Out From the Crowd
Every business has a unique selling proposition (USP) — and a big chunk of your success is going to be figuring out what your USP is.
Are you the cheapest option? Do you offer exemplary customer support? Lightning-fast shipping? An inspirational backstory? An exclusive brand? Once you understand what you’re offering that none of your competitors are, you’ll be able to use that knowledge to guide you toward your ideal pricing strategy.
Know the Rules Before You Break Them
Before you come up with a sensational new bespoke pricing strategy for your business, it helps to understand what the traditional pricing strategies are.
The most straightforward pricing strategy is cost-plus pricing. You simply take the manufacturing cost and then add a markup. This pricing strategy is an easy default since it guarantees a profit and doesn’t require any kind of in-depth market analysis.
A similar common pricing strategy is keystone pricing. This is when you sell at twice the wholesale cost. Like cost-plus pricing, it’s simple, easy, and profitable.
Long term, these pricing strategies might be too static for your business, but they’re a good place to start if you’re stressed out by all this planning and just want to hit the market.
Make Sure Everyone’s On the Same Page
Your pricing strategy needs to conform to your overall business strategy. Offering the lowest price on the market can get you some fast sales, but it may not make sense if you’re trying to cultivate a prestigious brand. Similarly, using a premium price could be a big stumbling block if you’re a new brand expanding into a new market.
Think hard about where you want the business to go and how you want to be perceived by your customers. Your pricing should reflect not just the actual value of the product and the prevailing market conditions but what you want your product’s perceived value to be.
Be Wary of Rock-Bottom Pricing
As we’ve mentioned, having the lowest price can definitely bring in some sales and help you establish a foothold in the industry. But it’s probably not the best long-term pricing strategy for your small business.
Why? The most obvious reason is that if you’re competing on price alone, there will always be someone who can offer a lower price. A bigger competitor with lower operating costs could wipe you out fairly easily if a low price is all you have to offer.
Think more along the lines of value-based pricing. What would your customers buy if your product didn’t exist, and what’s it priced at? What unique features does your product offer, and what’s the estimated dollar value of those features?
Adapt, Evolve, and Stay Flexible
Your pricing strategy is going to be based on a number of factors, including manufacturing costs, market conditions, customer budgets, and your revenue needs and expectations, among other things.
All of those factors are dynamic and can change dramatically if, for example, there’s uncertainty in the job market or if interest rates go up. That means that even the most effective pricing strategy needs to be continually reviewed and revised, or it risks becoming disconnected from the market.
Experts suggest reevaluating your pricing strategy at least once a year. You should also do a review if a new competitor enters the market, your revenue fluctuates, or new laws that affect your product are passed. Your pricing strategy review should also include a survey of your competitors’ prices.
The Bottom Line
In the ever-changing world of small business, one crucial element stands out: pricing strategy. It has the power to shape your company's path, profitability, and competitive advantage.
With these eight expert tips, you can navigate the complexities and make well-informed decisions. From analyzing market trends to understanding customer perceptions, each tip provides valuable insights into choosing the right pricing approach.
By optimizing your pricing strategy, you can unlock growth opportunities, enhance customer satisfaction, and boost your profits.
So, take control of your small business's future and use these invaluable tips to pave the way for long-term success.