One of the greatest challenges that many small business owners struggle with is pricing their products or services. There aren’t many resources on pricing strategies that are readily available, easy to find or easy to understand.
Unfortunately, the pricing strategy that many entrepreneurs engage in is one of being the low cost provider. Yes, that’s definitely a strategy, but you better have the processes that allow you to crush costs in an effort to maintain low price leadership. I don’t recommend this strategy for most small businesses as it is often just a race to the bottom (especially with the downward pressures that eCommerce) and most just don't have the needed resources to take on industry giants to be effective.
The second pricing strategy that I often see is a focus on copying a competitor’s prices. Again, probably not the best way to go given you have no idea what costs the competitor has or what their profit margins might be (if any). It seems logical at first glance, but don’t do it.
Another common mistake that a lot of small businesses make is letting their own relationship with money impact their pricing strategy. We all have a relationship with money based in how we were raised, past financial successes, financial stress we experience, etc. We have to be careful to not let our personal relationship with money negatively impact our pricing strategies. For example…If you personally believe that no one is worth more than $50/hr. for their services you will have difficulty billing yourself out at $250 or $300/hr. You can’t get caught up in this head trash and run a successful business.
So how do you come up with a successful pricing strategy? There is a lot to consider. Here are some of the basics.
- Understand what you are selling. Is it a commodity that everyone else is selling or do you have a unique product/service that is difficult for people to compare to others.
- Find your competitive differentiation. How are you different? Shout that from the roof tops. If you can’t find a differentiator the only pricing strategy left is to fight it out in the marketplace and that is not a sustainable strategy for most small businesses.
- Know your true costs. You have to understand direct costs as well as indirect costs and how they impact your profit margins.
- Understand the competition. You need to do market research, not to copy price, but rather to understand the market and understand where your product/service fits in the mix. Is it high end? Middle of the road? Again, what makes you unique?
- Don’t assume your price is too high. Don’t let your personal head trash about money negatively impact your pricing. Yes, you need to understand your true costs, but don't stop there and simply mark something up. Instead, consider what value your product or service is providing. When you focus on value, not price, you will get your price right while maximizing profits.
There are many other issues that go into pricing strategy like elasticity, scarcity and more. We will tackle that in more detail in a future webinar. Just know, that if you build a business that has a unique value proposition you can sell on value, not on price. That’s where the magic is.
If you’d like to learn more, please join us for a free webinar on July 31st at 8:30a.m. "Price and Pricing. Is Your Price Too High?" What do customers really mean when they say your price is too high? Spend half an hour with Tom Ulbrich to learn the 3 main tasks associated with pricing and the importance of executing them properly. Review psychological tricks in discounting and danger signs that you may be pricing your product too low.