Pricing for small business

Pricing for small business

Pricing your small business products and services properly is one of the most important and hardest business decisions you’ll make, and continue to make as your business grows and prospers.

It is tricky because the pricing equation is never as simple as adding a bit on to recover your costs. It centres on the perceived value or quality your customers have of your product or service. If they think it’s too cheap they might suspect something is amiss. If they think it’s too expensive then perhaps you haven’t positioned your brand effectively.

Pricing objectives and strategies

Price is part of the marketing mix, and so fits alongside your products or services, place and promotion to establish your value proposition to customers. Some pricing strategies emphasise high profit margins, while others focus on maintaining low prices and higher sales volume.

Your pricing objectives fit in with your short and long-term business goals and how you have decided to be positioned in the market. Your overall pricing objectives will influence the pricing strategies you use for all or some of your products and services.

Pricing considerations for small business

Six things you need to consider when setting your pricing are:

  1. Cost of production (making sure you cover your costs and make a profit)
  2. Market tolerance (what people are prepared to pay)
  3. Competition (what your competitors charge)
  4. Perceived value for money (what price people feel satisfied with)
  5. Importance and urgency (customers are prepared to pay more if time is an issue)
  6. The future (start where you want to end)

But pricing isn’t a one-off activity, you must monitor your key pricing influences regularly as part of your overall market research to ensure your prices stay competitive and you still meet your customers’ expectations.

You should review your prices annually. Start by analysing the market.

Analysing the market

Competitors: Compared to competitors’ offerings, how does your offering rank in terms of value and price? How often do you change your pricing? How often do your competitors change their pricing? Do you anticipate competitive actions or market shifts that will affect your pricing?

Target market: How easily can your customers find a substitute? Is your offering considered essential or optional?

Cost of goods: Do you expect your costs to affect your prices in the near future? Do you need to consider any looming market changes or buyer taste changes?

Strategy: Can some products take more of a price hike than others? Do you have a product or service that can be your ‘loss leader’, that is, a product you sell at a lower profit margin but people consistently buy that product with something else that has a higher profit margin? Securing the first interaction and gathering loyalty costs money but can lead to greater profitability. Would a loss leader strategy work for you?

Like all elements of your marketing mix and branding strategy, pricing has an important role to play. It is not simple and it is not static.

Pricing is a topic we look at in detail in the Beyond Business Groups program. You can find out more about us here.