White-in article.pngAs an entrepreneur, how much thought do you give to pricing?  Do you view it as an intricate calculation to which you do not devote a lot of time and consideration?  Do you simply try to copy what your competitors are charging?  Or, do you calculate how much you’d like to earn and set prices for your products or services from there?

The reality is pricing is a complex but essential component of a small business’ success. And the most important perspectives from which you should approach it are not the competitive field or your company’s bank account. The most important factors to consider are covering your costs and the buying habits of your customers.

When you look at your
costs, don’t just jot down a few notes and move to the next item on your to-do list.  Take a careful look at labor, marketing and sales costs for each individual product.  Be sure not to forget hidden costs such as debt service fees and rate of return on your own and others’ investments.  As the owner of the business, factor in your own salary.  Once you have your costs sorted, determine how much of a mark-up is standard in your industry. For example, jewelry is known to have a markup of almost 50 percent while restaurants markup around 4 percent. 

Then, when you turn to getting to know your customers, you may want to undertake
market research.  If you are a micro-business, you might conduct informal surveys of your existing customer base.  However, if you have the budget, detailed research conducted by a third-party consulting firm will allow you to segment your market and analyze how they make decisions (e.g. by price, by convenience, or by perceived status of the goods and services).

With cost-conscious consumers, you may want to investigate couponing strategies, temporary discounts, and a gradual lowering of prices during an economic downfall.  However, keep in mind that even when marketing to consumers who are looking to save money, a sudden price decrease may create the impression that your company is in financial trouble.

With
status-conscious consumers, under-pricing and discounting may actually work against you.  People who fall into this category do not want to own or associate with a product or service that is viewed as “cheap.”  Companies can gain status not only by pricing their products in the high-end range but by garnering positive word of mouth and by becoming the de facto standard for an industry.

Some techniques to bear in mind when increasing or lowering prices are as follows:

  • You can always reduce prices gradually, if necessary.  If you are cutting prices in response to a recession, don’t offer discounts across the board.  Consider cutting prices only on lower-end items to maximize sales volume.
  • Offer discounts incrementally, e.g. only to new customers or for a limited time period.
  • If you think a price cut will be viewed negatively, it is okay to repackage products and services into different configurations, or to offer fewer features for the same price.
  • Consumers are often willing to pay more for items if they fear the lower-priced item may require an upgrade sooner.  This is particularly relevant to small businesses in the technology and electronics sectors.
  • Charm prices, or prices that seem lower even though they are not, i.e. $19.99, should be considered.  The buying process is perception based, even for the most intelligent shoppers. The bottom line is: $19.99 just feels lower than $20.

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Finally, pricing is not a static exercise you should be continuously monitoring the prices charged by competitors in your industry.  You can test new prices, discount strategies and different packaging of goods and services.  And when you do make a major change, whether it’s an increase or a decrease, make sure to communicate with your customers in order for their trust in you to remain intact.  Remember, at the end of the day, your pricing reflects how you value yourself and your business.