Getting your price right

Pricing can be a tricky issue for small businesses. Setting your prices too high can reduce sales abruptly, while undercharging can lower your profits.

Developing your pricing strategy

The prices you charge for your products or services can have a dramatic effect on sales and profits. Your pricing strategy also determines how customers view and respond to your product or service.

What does the market say?

Buyers’ risk can be one of the most important factors in getting a higher price. Would you feel confident buying a cheap parachute? Ask yourself:

  • Which products do customers see as offering the best value?
  • What do customers expect to pay for your products or services?
  • Which products are likely to be the most successful?

Consider what you can do to reduce or reverse the risks a buyer might see in your products or services so you can charge a higher price. For example, offer a better guarantee than your competitors.

How do your competitors price?

Your competitors will influence your pricing to some degree. Think about:

  • Who your competitors are and what they offer.
  • What the key features and benefits of their products are.
  • How their prices compare with yours.

Do your products or services have a clear point of difference? If you can offer more, such as better quality, more features, or free installation, you may be able to charge more.

In addition, decide how you want to position your products or services. For example, customers often associate a high price with a premium product or service.

Consider cost in relation to pricing

There are a few pricing tactics you can employ to help structure your strategy and to get it right.

Using cost-plus pricing

Cost-plus pricing is an essential starting point to avoid selling at a loss. Ensure you:

  • Calculate all the costs in producing your product or service.
  • Add a margin for your profit.
  • Get an accountant to check you have included all costs.
  • Make sure your price includes enough profit to sustain and grow your business.

But remember, the cost-plus approach doesn’t take into account:

  1. The level of demand.
  2. What competitors charge.
  3. Market expectations (what customers expect to pay).

Consider these three issues before making your final pricing decisions.

"Do your products have a clear point of difference? "

Benchmarking your performance

It can be useful to benchmark your performance against industry averages – for example, gross profit and net profit averages for your industry. Your bank manager or accountant can help you find these benchmark figures.

If you discover your margins are below industry norms, this may suggest your costs are too high or your prices too low.

How to vary your pricing tactics

Varying prices can increase your profitability. Typical tactics include:

  • Using loss leaders to capture customers who will also buy more profitable products.
  • Charging different prices at different times of the day, week or season to reflect changing demand for your product.
  • Charging different prices for different levels of service or product specification.

Employing discounting strategies

As a start-up business, you may be tempted to price lower than your competitors. However, customers can see low prices as a sign that you lack confidence and experience.

You also don’t want to start a discounting battle against stronger competitors – nobody wins except the customer.

Discounting can be worthwhile in special cases, but only if it achieves your aims. For example, clearance discounts can help you to sell off old stock and improve your cash flow.

Aim high to make a profit

Underpricing your product can be even more dangerous than overcharging. Remember that while prices are low, so too are your margins.

It’s far easier to reduce prices than to increase them, so if in doubt, try higher prices first. You may discover your target market isn’t particularly price sensitive.

Some other pricing tactics to try

Special pricing tactics may work in particular situations. For example, bundling additional products together and charging a package price can work well if the customer sees a greater increase in value than your actual additional costs.

Setting prices at psychologically attractive ‘price points’ is a well-established tactic in retail. For example, customers see $49.90 or even $49.99 as being considerably less than 10c or 1c cheaper than $50.

But make sure you have a plan that allows you to increase your prices above this price point, or you may be stuck with it forever.

Keep reviewing your prices

Review your prices regularly to ensure they’re optimal and that you’re keeping up with trends in your industry and the overall market.

Any changes in turnover can signal a pricing problem or an opportunity. For example, if you sell products with high or growing market share, this may be an opportunity to increase prices.

If you sell your time, then getting in more business than you can cope with may be a signal to increase your pricing. Similarly, if you quote or tender for business, too high a success rate suggests you’re underpricing.

When to increase your prices

Increasing your prices can sharply increase profits, even if your turnover drops. Consider increasing prices when demand is high. For example, the price of paint tends to increase towards spring when people plan to redecorate.

Always explain to your customers why you’re increasing prices. Give them fair warning, especially if they need to budget for the increase. Regular, small changes are more easily accepted than sudden, large price rises and can help to keep you ahead of inflation levels.

Next steps

  • Work out all your costs in producing your product or service and get your accountant to check you haven’t missed any costs.
  • Once you know the baseline cost, research market demand, customer expectations, and what competitors charge.
  • Consider other factors such as constraints, product demand and life cycle, and your desired market positioning.
  • Ask your accountant or bank manager if they can supply benchmark gross profit and net profit margins for your industry type.
  • Keep reviewing your costs and pricing against industry benchmarks and changing conditions.

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