Pricing strategy is an important aspect of the business. Proper pricing may help you gain an advantage over your competitors. Setting the right price can often be a daunting process. Too low pricing will not help you generate enough profits, whereas a high price may not get you more customers because it is likely that the customers may start looking for a cheaper alternative. You will never like to lose potential customers because of incorrect pricing. So, here we present a guide that will answer all your queries on how to set the right prices for your small business.
Do not Compete on Pricing Alone
Pricing is complex and is not just limited to the manufacturing costs related to the product or the service; it is beyond that. It may comprise a mix of brand promotion, marketing, and other miscellaneous activities. Desirability is another big concern as there are situations where customers make choices based on the emotional appeal of the products. Setting the lowest price is never the right strategy, and setting the highest price is also not convenient. Selecting the proper price depends on several factors. Here are some aspects you must keep in mind while deciding your prices.
Ceiling Price: The ceiling price refers to the highest price that the customer would be willing to pay for your product. Conduct research and survey to understand the psychographics and behavior of your target audience. It will help you determine the maximum amount customers are willing to pay for that particular product or service. For instance, if the customer is willing to pay $200 for a product, you should consider pricing it accordingly. However, you can also target the luxury market and set higher prices.
Competition: Do not just look at the prices of the products that your competition is offering. Check the value they are providing. See what kind of offers they provide. You must also analyze the kind of audience they are targeting. Offering lesser prices than the competitors could be an effective way to win over the target audience, but it should not be a mere approach. Consider all other factors to understand the competition and set the prices accordingly.
Price Elasticity – Price elasticity refers to the measurement of the change in consumption of a product in relation to the change in price. If the demand for the quantity changes with the change in the price, then the good is elastic. Therefore, this factor will help you understand customer response and how it could impact the demand and/or supply.
Types of Pricing Strategies for Small Businesses
Let us understand the types of pricing strategies that your small business can choose.
Penetration Pricing
It is a common strategy that startups adopt to build their market base in the initial stages. This strategy is aimed at attracting buyers by offering low prices initially and increasing the costs later. However, it is necessary to understand that this strategy can impact customer loyalty over time. You may win customers by offering competitive prices, but there are chances of losing some loyal customers because of the change in prices.
Price Skimming
Price skimming is another strategy that may be ideal for small businesses. It involves setting higher prices in the beginning phase and lowering the costs as they expand. Tech companies mainly adopt this approach as their products are in high demand. Keep in mind that the str ategy may not work if the competitors are offering similar products.
Psychological Pricing
It is an effective strategy that advertisers and marketers use to encourage users to make decisions based on emotional aspects. Create an illusion in the customers' minds and focus on their psychological needs. If you are using this strategy, you must also aim to improve your product's overall quality.
Economy Pricing
Economy pricing is a strategy that targets price-conscious customers. Generic food suppliers and discount retailers often use this strategy to build a market base. In the long run, it can be challenging for small businesses to cut down production costs. Therefore, small businesses should consider all the factors and make decisions strategically. The strategy may be ideal for airlines that may be offering budget airline fares. This strategy may help fill empty seats and lower the cost per unit.
Premium Pricing
If you are entering a market with a unique brand, then you can consider adopting this strategy. You can set higher prices to reach your target market with your impressive range of products. Do not just focus on creating a high-quality product. Instead, pay attention to the product's packaging and offer the best experience to your customers. For instance, Apple is such a tech giant that sells its products at premium prices.
Bundle Pricing
Small businesses that want to create large margins and sell multiple products at once should adopt this strategy. Many small businesses adopt this strategy to get rid of slow-selling products.
Geographical Pricing
Small businesses can also consider setting prices according to the location. For instance, you can change taxes, shipping costs, location-specific rent, and various other things.
Value Pricing
You may also consider setting prices based on the customer's perceived value. Look at the additional values and services your brand provides to the customers, then set your price. This strategy is effective and creates a potential for high-profit margins. It can also help in increasing customer loyalty in a short period of time. For instance, premium packaging and personalized gifting could be an experience that you can offer to the customers.
Dynamic Pricing
It is a flexible pricing strategy that aims at selling the goods at different prices depending on who is buying them and when they are buying. For instance, the airline industry keeps changing prices depending on seasonal conditions and other factors.
Competitive Pricing
This aims at selling the products at a better price than the competitors. It is a strategy most used by small businesses just entering the markets. However, it may not be an ideal strategy in the long term.
Steps You Should Take to Set the Pricing
Here are the steps you must follow to decide the final price of your product and services:
Step 1: Calculate Your Costs
For this, you must consider calculating all types of costs, which may include the following:
Cost of raw materials
Cost of labor
Cost of merchandise
Cost of shipping and delivery
Overhead costs such as rent, payroll, and software expenses
Step 2: Find Your Overhead Percentage
It is the percentage of your sales that will go towards the operating costs. You will need your annual gross sales and annual operating expenses to determine the overhead percentage. Here' s the formula that you must use:
Expenses/ Gross Sales = X
X*100 = Overhead Percentage
Step 3: Choose your Markup
Markup is the amount at which you wish to mark the products. Basically, it will be the profits you may generate after selling the goods. Consider all the above strategies and decide on a markup percentage. Take the help of a financial planner and expert to determine your product's final cost.
Step 4: Calculate the Price
You may now add all the costs, overhead expenses, and markup amount to determine the final costs. If there is anything miscellaneous, you must add it too to determine the final price.
Step 5: Evaluate Your Pricing
Look at the market conditions and consider your target audience to determine the final price. You may likely have to cut down certain costs to adjust the price and make it more convenient for the target customers.
Final Thoughts
We have covered all the strategies and steps that small businesses should take to set the right prices for their products and services. As mentioned above, price is a critical factor, but you should not just prioritize the profits. Consider all these aspects to determine the right price for your product or service.
