Pricing Tips and Warnings
One of the major goals for small businesses just getting started or those revisiting a pricing strategy is to successfully make a profit. Pricing refers to the process of setting a price for a product or service. This strategy, more than any other element of your marketing plan, will have the biggest impact on the amount of profit you make. Industry experts from the United States Small Business Administration and American Express Open Forum have several suggestions to consider when setting (or revisiting) your pricing strategy.
- Understand Costs – Small businesses should take the time to analyze their services/products total cost. Many companies fail to evaluate all the components that need to go in to setting a price for profitability. Here are some areas to consider when establishing a price range: cost of materials, cost of labor, salaries and benefits, overhead (taxes, rent, insurance, marketing and transportation), showroom or storage costs and credit card fees.
- Do a Competitive Analysis – Before setting a price for your products or services do an analysis of your closest competitors including a list of their strengths and weaknesses both tangible and intangible. Look at comparable pricing and the package that is involved. If at all possible try to understand the reasoning behind the pricing. How did they come to that number? Never assume that your competitor has the pricing right. Be ready to explain the difference in pricing. For example does your business offer better quality, customer service, value, experience or cost savings? Don’t make the mistake of thinking that your competition has done their homework and base your numbers off their research.
- Understand the Customer’s Needs – Not only should businesses evaluate their competitors but also the targeted consumer. What are their needs? For example analyze the customer that you have. Do you offer intangible things like stability, reliability and experience? Does your customer need something specific from you? Tailoring yourself to those customers can add features that meet their needs and thus can be priced higher.
- Take Advantage of Tiered Pricing and Flexible Pricing – There are a multitude of options when it comes to structuring your pricing models. Understand what the customer is willing to pay for the base product and then include add-ons and high value features. Don’t get stuck in a pricing war as well. If your consumer is willing to throw extra business your way in the form of referrals or partnerships then by all means use flexible pricing that will keep them loyal to your brand.
(Sources: U.S. Small Business Administration, Business Online, American Express Open Forum)