March 2, 2023 | Last Updated on: August 31, 2023
Your small business might be getting ready to open, or you might be interested in improving the profitability of your small business. In both cases, you should be interested in developing and implementing an effective pricing strategy for your small business.
Developing a great pricing strategy has key benefits for your small business. First, more effective pricing can help you increase your sales to customers. This will allow you to increase your bottom line and improve your small business’s overall profitability. This can also improve the efficiency of capital in your business, making your business more appealing to investors and lenders. Better pricing can help you reach your target customers and allow your small business to flourish.
Yet, whether you are about to launch your small business or improve its current standing, defining and executing an effective pricing method can be hard. Many large companies hire pricing consultants simply to revise pricing continually as a way to make their business more profitable. Yet, it does not take sophisticated pricing consultants for your small business pricing strategy to succeed. In this post, we will review all the information you need to make your business profitable or improve its profitability through a great pricing model. We’ll cover the following topics in detail in this post:
The first step in developing the best pricing strategy for your small business is to define the goals that you have. While this might seem like a broad concept, your business goals are highly relevant to help define success for your small business.
For example, you might have started a coffee shop in your hometown. Your coffee shop might cater to being a place for everyone to stop by and enjoy nice homemade sweets and great coffee. As a result, your prices might need to reflect a degree of affordability.
In other cases, your small business might be a high-quality clothing brand where you make specially designed clothing for your customers. The high amount of labor and care that goes into the production of these products might necessitate a higher price. This might especially be the case if there are no other brands like yours.
Alternatively, you might run a small business convenience store. You might be interested in increasing overall customer spending at your store. Your goal of increasing revenue might be best managed by certain bundling strategies or other business strategies that create more revenue per customer.
In any case, it is best to think about the goals of your small business. You should write these goals down and keep them on hand as you evaluate some of the examples of the best pricing strategies for small businesses. This can help you recognize what kinds of competitive pricing strategies you may need to take and help you leverage your competitive advantages to achieve your small business goals for yourself and your customers.
Defining your small business brand is a critical part of developing the best pricing strategy for your small business. Ultimately, understanding your brand requires a good understanding of your customer base. This means knowing who your customers are, what their needs are, and how to best reach them.
If you are on the road to becoming a small business owner, you may have identified who your likely new customers will be. Your business plan should include information on who your customers or early adopters will be, what their interests will be at a given price point, and what sorts of new products they will be looking for. Alternatively, if you have an existing business, you probably already know the wants of your customers and their reactions to different retail prices. You likely have formed customer relationships and deeply understand the needs of your customers.
This is important when deciding how you should price your product. The key reason for this is that it is your customers who will ultimately respond and decide whether to buy at the price that you offer. As you raise or lower your prices, you will experience a decrease or increase in business, respectively, according to the change resulting from price-sensitive customers.
Ultimately, for some small businesses, it will make sense to offer a lower price for your products than competitors. A low price, in general, can help attract a wider base of customers. However, this might lower your margins. Your overall profit might improve, but your margins might suffer. This strategy might not be good for high-quality goods or brands with great reputations. This is because the high price might be reflective of the quality of the production of the good.
At the same time, different pricing strategies can offer your brand the opportunity to increase its prices through markups. By marking up the price of goods, you can try to appeal to a smaller market share who is interested in buying luxury or high-quality goods. By increasing your margins on the products that you sell, this new pricing strategy has the potential to improve your profitability through your small business’s profit margin.
Understanding your customers and how they will respond to price movements, discounts, or other forms of pricing and marketing strategies will be fundamental to selecting the right price for your small business products and services. You likely know your customers best, so keep this in mind as you review potential small business strategy options.
Once you have your business goals and brand details in mind, it is time to move to delineate the costs of producing the goods or delivering the services that your small business offers. Logically, you would not want your small business to price anything below the cost that it costs to produce your goods or services. As a result, you want to make sure that you understand your costs so that you do not lose money.
If you are a new small business, you can start by estimating the different costs you will incur for the various products and services that you will offer. While these estimates may not be perfect, attempting to estimate your costs with the information you have on hand can be a good start.
If you are already in business, you might consider drawing up a list of all of the products or services that you offer and estimating the costs that you have as an average for each product or service. This real data can offer a fairly accurate picture of the costs that your small business is facing.
These estimates can help you as an entrepreneur to understand your costs better. Since your pricing will ultimately depend on needing to be higher than your costs in the long term, you need to know what your costs are. Without frequently knowing the real-time costs that your small business is experiencing; you could become unprofitable or go out of business.
As you prepare your pricing strategies, keep in mind the costs that your prices will need to support. You should price your different products and services differently, so make sure to know the costs of each item or service requiring pricing.
The last step of information-gathering that you need to do before deciding on pricing strategies for your small business is to conduct a market analysis. First, identify the market that your small business plays in. The first thing you can do is to think of the industry that your small business is a part of. This might be agriculture, manufacturing, retail, fast food, or some other type of product or service industry.
Next, consider the exact type of business you are in. You might be a unique homemade clothing brand, or you might be a small-town local cafe. You might be a local farm producing lemons and limes. Alternatively, you might have an e-commerce business buying and reselling artwork. You should also consider the geography in which your small business is operating. Think about whom you market and sell to as a small business.
The next step is to consider the amount of revenue that your small business takes in or the amount of revenue that you expect your small business to take in. By doing so, you can begin to identify the competitive size of your business when considering things like revenue.
Now that you have the information necessary to identify your small business’s competition, you should determine who your competitors are. Make a list and gather their pricing information. You will want to compare your products and services against theirs. It is ideal to make a spreadsheet with different competitors, their products, and their prices. This will allow you to see the average prices of certain products or services that you might offer and where opportunities might arise.
While price certainly does tend to correspond to quality, there will be some price sensitivity among consumers when you set prices. If your goods or services are really expensive, some customers will seek out different products or services from your competitors. At the same time, having the lowest price may be unaffordable or create a race-to-the-bottom effect of prices among your competitors. This can make the sustainable operation of your small business quite difficult.
Although raising prices by a lot might take some of your customers away from you, having slightly higher prices than your competitors may not have as large of an effect. Not all customers may notice the difference between your prices and your competitors’ prices. Moreover, your price signaling may signal to customers that your product pricing is reflective of having higher-quality products or services. The value of your product may still be reflected in having slightly-higher prices while allowing customers to continue to affordably shop at your small business.
Doing this competitive analysis and keeping this information on hand can help your business as it continues to conduct eventual price increases or to have information on the competition. This allows you to be informed and in touch with the developments of local providers of goods and services with your small business. Although this will require some of your time to put together, it will be well worth it due to its potential to be beneficial for the pricing and revenue performance of your small business.
Now that you have the relevant information and competitive market analysis on hand, you are ready to assess what pricing strategies your small business can use. We will review the best pricing strategies for small businesses in this section, but it is important to remember that different pricing strategies are best in different situations and different industries.
Not all pricing strategies are perfect in all scenarios. Being careful with which pricing strategy you select for your small business is important. As a small business owner who knows your business situation the best, you should consider each pricing strategy in the context of your small business. You can use one or multiple pricing strategies, on one or more products or services, in a combination that truly optimizes your small business pricing strategy.
Penetration pricing is a strategy of using discounts for your small business to penetrate the market and gain market share.
If you are a new business, a penetration pricing strategy can allow you to increase the amount of business you would otherwise get by offering discounts to your customers. This can help spread the word about your products and services and your new small business. When you go to raise prices later, you will likely already have a loyal customer base.
If your small business is already operating, penetration pricing can allow you to increase your market share by attracting new business at a lower price point or diverting business away from your competitors at a lower price. This can help get customers to enjoy your small business over others or help them commit to shopping there.
You should be careful in the number of discounts and length of discounts that you offer through penetration pricing, however. Really large discounts may make selling a given product or service unprofitable. Sustained discounts can give your business a reputation of being a discount business and shift your customer base to discount-seeking customers and potentially putting your reputation at risk.
Premium pricing is, as it sounds, where you price your goods or services at a premium. While it is obvious that if you were to sell the same amount of goods after premium pricing increases, your revenue would increase in response, it is not immediately obvious that your number of goods or services sold would stay the same or increase. The expectation might be that your sales could decrease.
Premium pricing is a type of price signaling which is done to signal the differentiation of your product or service from other types of small businesses. The higher prices signal to consumers that your product or service is high-quality, and some consumers might be willing to pay for that premium product.
At the same time, if you go with premium pricing, you might be risking alienating part of a potential customer base. Premium pricing can increase your revenue, margins, and better your reputation as a luxury or better-quality business, but it comes at the risk of losing some of your customer bases due to price sensitivity.
Competitive pricing is when a small business tries to price its products or services below that of other competitors. This strategy can be appealing in its potential to divert customers away from competitor businesses to your small business. If customers recognize that your small business offers lower prices than other competitors that they might shop at, some of the customers might begin shopping at your business.
The increased volume of business, even if at lower prices, has the potential to increase the profits of your small business. However, you need to make sure that your pricing will be sustainable in the long run. If you continually support lower prices than your competition, your margins may be driven down, and you might not be able to operate profitably. Alternatively, having lower prices than your competition may be a negative signal to customers that your brand is focused on being cheaply priced rather than high-quality.
Price skimming is a technique used to help your small business adjust its prices over time. This pricing strategy is especially found in e-commerce small businesses. You might start selling a product or service at a high price and then lower the price over time. This effect helps to accomplish a lot of things.
First, price skimming allows small businesses to efficiently capture consumer surplus. Consumers are willing to pay different prices for different items. Some customers value certain goods and services more than others. However, customers usually pay the same price, which is advertised uniformly. Some customers do not buy a good or service because they perceive its value to be less than the price. Other customers pay less than what they value for the item. Some pay just as much as it is valued to them in a price.
Thus, by starting your price high and subsequently reducing your price, you can capture the surplus of all customers. First, customers that value your product will buy at the high price point, with customers who value your product less and less will buy at subsequently lowered price points. This allows your small business to maximize its revenue if done correctly.
However, this method of pricing also has potential disadvantages. By pricing your product or service high at the beginning, some customers will not buy your product, may not return to buy from your small business due to perceptions about the prices, or might be incorrectly convinced that your price will not decrease in the future. In any case, this pricing has a risk associated with it. It is likely best used when you already have an established customer base.
Psychological pricing is another pricing strategy that can be easily implemented in your small business without additional costs. Psychological pricing is when a small business implements a pricing change away from whole numbers and toward numbers that make a customer psychologically more likely to buy a service.
The easiest example of this is in pricing. You may have seen many prices listed, like $9.99 instead of $10. The price remaining at 99 cents as opposed to a full dollar makes the customer perceive the price as far less than ten dollars and makes a customer much more likely to buy a product or service. You can consider additional studies done on the psychological aspects of pricing that help push customers to buy certain products or services. This type of pricing has fewer downsides than other pricing strategies. This strategy, when implemented correctly, is a great strategy for every small business to use.
Bundle pricing may seem like an intuitive way to increase the sales volume of your small business. Bundle pricing works by offering a discount for products or services that are bundled together for your small business. If you have a small business spa, for example, you might offer discounts on additional services which are bundled together with other services.
While this reduces the margin on individual products, this strategy can ultimately increase revenue and profits as a result of the pricing strategy when done correctly. However, if you bundle your prices too low, you might have decreased overall revenue. You want to be careful to bundle items that will increase your sales volume to the point where you make more profits. Since your margins will likely suffer as a result of the bundling, you want to have enough profits to support the decision from bundle pricing.
Cost-plus pricing is a generally good pricing strategy for small businesses. It is especially useful if you intend on raising capital in the future, have a good cash flow, or are attractive to lenders. This is because many investors and lenders will be interested in your cost of goods sold, operating margin, and net profit. These margins can be easily controlled in cost-plus pricing.
Cost-plus pricing works by starting with the costs of a product or service that your small business is offering. You then add a percentage of the costs that you choose to equal the total price that you charge. The percentage that you add is the amount of money that goes into costs that are not the cost of goods sold. The higher the percentage, the better your margins, but the more likely you are to deter potential business.
Economy pricing for small businesses is a pricing strategy where prices are set low because businesses expect to sell a lot of goods or services at a given price with low costs of acquiring customers. This kind of pricing might make sense for a restaurant small business selling things like water or sodas, which can be easily purchased at a different business at a lower price if they are priced high at your small business.
Value-based pricing for small businesses is a pricing strategy that allows you to set your prices for your goods and services based on perceived value. Perceived value can be any value that your customers perceive your goods to be worth, despite their costs. Things like paintings, clothing, or jewelry might be examples of things that qualify for using value-based pricing due to the greater difficulty of assigning a value unique to what is being created. The key for this type of pricing is to have a differentiated product or service from competitors so that you have some flexibility in determining the price.
Dynamic pricing is a great pricing strategy for small businesses that want to be able to change their price over time. Since demand can fluctuate, dynamic pricing allows small businesses to capture the surplus of different customers at different times of day, month, or year. For example, if you own a hotel, dynamic pricing might allow you to charge a price as you run out of hotel rooms on a given day or charge more for more popular times of the year to stay in your hotel.
Developing a good pricing strategy for your small business is important. It plays a large role in your revenue, margins, and profitability. The steps provided to you in this post give you a great basis from which to develop your own pricing strategy that works best for your small business.
By defining your goals and understanding your brand, you can set up a good basis for understanding your relevant pricing strategy options. Delineating your costs and conducting a market analysis can help your small business assess the feasibility of implementing pricing strategy options. Once you have everything in place, you can review your pricing strategy options and combine the strategies that work best for your small business.
As you go forward and drive your small business to increased profitability, remember to constantly be reviewing and updating your prices and pricing strategies. Sometimes market dynamics can change, and being on top of your prices is one of the best ways to improve the profitability of your small business.
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