15 Sep Pricing Strategies That Will Keep You in the Clear
If there were a version of TV’s Price Is Right for small business owners — one that involved setting the right prices, not guessing them — the winners of that game would be the businesses with pricing strategies that managed to find the sweet spot. Neither too high, nor too low, but rather at a point somewhere in between that ensures a profit and attracts customers.
Finding your pricing sweet spot
Effective pricing strategies, according to Charles Toftoy, associate professor of management science at George Washington University, are “part art and part science.” When prices are set too high, customers look elsewhere. Too low, and the business takes a loss.
So, how do small business owners, like you, arrive at the right price point for products/services? Key considerations include:
Your costs – It goes without saying that making a profit hinges on making sure the costs involved in doing business are covered. It’s not just the costs of materials and production, but also things like payroll, taxes, employee benefits, and insurance, not to mention overhead costs like rent and utilities. Neglecting to factor in these figures when setting prices increases the risk of underpricing your product. Factoring in every single one of them for every item, however, can lead to overcharging. Total your operating costs on a spreadsheet to get a good idea of the gross revenues you’ll need to be profitable. Use those numbers to guide your pricing, rather than dictate it.
Your competition – Research your competition. If the products they’re offering are comparable to yours, you might want to use their pricing structure as a starting point for your own pricing strategies. Nothing wrong with that. But instead of merely going head-to-head with the competition, consider ways your business can stand out. Is the quality of your products/services higher? If so, in what ways? The answers to those questions could become an integral part of your marketing messages and easily substantiate a higher price for what you have to offer.
Your customers – Know your target customers and understand what matters most to them in relation to a product like yours. Are they primarily budget-conscious? Convenience-centered? Or are they drawn to products that bring a certain status? The more you know about your customers, the better you’ll be able to effectively address their needs. It’s knowledge like this — gained either through your own surveys and research or with the help of a professional marketing firm — that leads to pricing that nurtures sales.
Continually re-evaluate your pricing strategies
After you’ve set your prices, you’re bound to wonder, “Did we get it right?” And the only way to know for sure is to continuously monitor those prices. Focus, on a monthly basis, on the profitability (or lack of profitability) of every product you sell. If online sales are a component of your business, you might want to look into dynamic pricing, a tech-driven approach that allows prices to change based on demand, season, and other factors. Whatever method or methods you use, be relentless in managing your product pricing. In the competitive world of business today, it could mean the difference between going under or rising to the top.