Pricing can be a tricky issue for small businesses. Setting your prices too high can reduce sales abruptly, while undercharging can lower your profits.
Getting your price right
The prices you charge for your products or services can have a dramatic effect on sales and profits.
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 or services do customers see as offering the best value?
- Which products or services are likely to be the most successful?
- What do customers expect to pay for your product or service?
Consider what you can do to reduce or reverse risks a buyer might see in your product. For example, offering a better guarantee than competitors so you can charge a higher price.
Your competitors’ influence
Competitors will influence your pricing to some degree. Do your products 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. Ensure you find out:
- Who your competitors are and what they offer.
- The key features and benefits of their products.
- How their prices compare with yours.
In addition, decide how you want to position your product or service. For example, customers often associate a high price with a premium product or service.
Costs and pricing
Cost-plus pricing is an essential starting point to avoid selling at a loss. Make sure you:
- Calculate all the costs in producing your product or service.
- Add a margin to your costs to establish a profit.
- Get an accountant to check you have included all costs.
- Double check there’s enough profit to sustain and grow your business.
But remember, the cost-plus approach doesn’t take into account:
- The level of demand.
- What competitors charge.
- Market expectations – what customers expect to pay.
Consider these three issues before making your final pricing decisions.
It can be useful to benchmark your performance against industry averages. For example, gross profit and net profit averages for your industry. .
If you discover your margins are below industry norms, this may suggest your costs are too high or your prices too low.
Varying prices can increase your profitability. Typical tactics include:
- Using loss leaders to capture customers who will also buy more profitable products or services.
- Charging different prices at different times of the day, week or season to reflect changing demand for your product or service.
- Charging different prices for different levels of service or product specification.
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.
Under-pricing your product or service 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 is not particularly price sensitive.
Other pricing tactics
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 recognised 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 could be stuck with it forever.
Keep reviewing your prices
Review your prices regularly to ensure they are 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 under-pricing.
Increasing your prices
Increasing your prices can sharply increase profits, even if your turnover drops. Consider increasing prices when demand is high. .
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 o