Nailing Down the Perfect Price Point
If you own a small business, pricing is a tricky proposition. Your goal is try to set the correct price right off the bat, one that isn't confusing or will turn off potential customers. Plus, it has to be at a value that helps your company stay afloat financially, supports brand building and allows you to compete with other companies.
Some people base their entire careers on pricing strategy. Luckily, no matter your background, these few simple principles can help you be both competitive and profitable.
Three basic issues to consider when setting prices
Different aspects of your business -- and your competitors' businesses -- will influence your pricing strategy and the final price you choose. Your most important considerations should be:
Cost. What was your cost-per-unit to procure the item from your supplier? Make sure you include shipping charges and other costs involved to get the item ready to sell.
Competitors' prices. What could your target customers pay for the same item or service – or something similar – with your closest competitors? If there are major differences, consider why. Do some competitors have greater overhead? Do they have less expensive suppliers?
Value. Consumers aren't motivated solely by price. The environment you provide and your product selection, along with many other factors, determine the price you can get – and the price competitors can get. Dr. Tim J. Smith, managing partner at Wiglaf Pricing and author of Pricing Strategy, urges entrepreneurs to compare. "Are you better or worse than your competitors? If you're better, your price should be slightly higher. If you're worse, it should be slightly lower," he says.
Once you've established these values, you should have a range of prices. At minimum, you should recoup your cost-per-unit. Ideally, you'll also fund a small percentage of your operating costs -- including rent, payroll and utilities -- with each purchase. Higher operating costs hopefully result in higher value for the consumer, meaning that the right customers will pay a bit more for your products.
Related: How Much Should I Charge Clients?
Four deeper details to remember
While it's important to know your maximum and minimum, you still need to fine tune your price by considering the following variables.
Market research. Do your homework about your product. How much can you realistically plan to sell? Are your target customers price sensitive? Do they have other places to get a similar product in your area? Adjust your price based on your answers.
Sales and discounts. Does your business model involve frequent promotions, or will you have a sale once or twice a year (or possibly never)? If you plan to discount this product regularly, set the price higher to compensate.
Shrinkage. If the item you're pricing is often a target for shoplifters --like cosmetics or alcohol -- the price you set should reflect this.
Legal issues. Manufacturers are allowed to impose minimum prices on retailers selling their goods. There may also be regulations against setting your price too high or engaging in some forms of price discrimination -- that is, selling the same or similar goods or services at different prices to different customers.
There are typically more reasons to raise your price than lower it. Smith advises that highly successful entrepreneurs pursue a different pricing strategy than that of corporations.
"Rather than going after market share by setting low prices, entrepreneurs start prices extremely high and go down, in order to build cash flow. Go for the highest price you can," he says.
Even if this limits your customer base, know that fewer, more profitable sales will help your business more than many sales at low margins.
The bottom line
Pricing is difficult, and small-business owners can't afford to set a price and forget about it. As your costs, competitors and customers for items change, your price will have to respond. If demand for one product decreases, consider lowering its price and in turn, making up the difference with other products. Getting it right the first time should be a priority but flexibility and continued research are also key to maintaining good pricing strategy.
Entrepreneur Editors' Picks
Online Scams Are More Sophisticated Than Ever. Here's How to Shop Safely on Black Friday and Cyber Monday, According to a Cyber Intelligence Expert.
This Guy Saved Barbie From Cultural Extinction. He Did It by Asking One Big Question.
The Top 5 Hot Franchise Categories for 2023, According to One Industry Expert
Why Can't We Resist Black Friday and Cyber Monday? A Behavioral Economist Explains the Psychological Forces That Make Sales Irresistible.
I Couldn't Sleep. I Obsessed Over My Failures. Then I Found the Weirdest Cure.
This Pitch Scored a $250,000 Investment — But It Almost Didn't Happen
Employees Were Demanded to Go Home. Here's How We Invite Them to Come Back.