One of the biggest challenges small business owners face is determining what to charge for their products or services. When the price is right, the path to purchase is reduced, customers are happy, and businesses see more sales revenues and profits. But a price that is too low or too high can wreak havoc on a company's bottom line.
Whether you are just starting your business or have been running it for many years, it is essential to understand the fundamentals of pricing. Confident, well-researched pricing demonstrates your expertise and the exceptional value you provide. This Huddle Business Capital blog article discusses five small business pricing strategies to consider.
What is a pricing strategy?
Before we cover some commonly used pricing strategies, it is essential to explain what a pricing strategy is. Simply put, a pricing strategy is the approach you take to set the prices of your products or services. Although it sounds simple, developing a pricing strategy is an involved process that requires you to consider many factors.
These include production costs, target audience, competition, and desired profit margins. By carefully analyzing these factors, you can determine the optimal price point that balances customer affordability with business profitability.
Implementing a pricing strategy is not a one-time exercise; it requires ongoing monitoring and adjustment to adapt to changing market conditions and customer or client expectations. You can stay ahead of the competition by continuously evaluating your pricing and making strategic changes when needed.
1. Cost-plus pricing.
Cost-plus pricing, also known as markup pricing, is one of the most straightforward strategies to understand and implement. With this approach, you determine the cost of making a product or providing a service and add a predetermined markup to the cost, which is the final selling price to the customer or client.
Cost-plus pricing ensures you're recouping expenses and generating a profit margin to sustain and grow your business. Companies in myriad industries use this type of pricing, including manufacturing, construction, retail, and professional services (business consulting, marketing, financial planning, etc.).
2. Value-based pricing.
Value-based pricing is different from cost-plus pricing in that it is based on the perceived value of a product or service. By basing your prices on the customer's perceived value rather than just your costs, you can ensure you're charging what your offerings are truly worth. This strategy is worth considering if your business offers unique products or services.
Some of the many industries that use the value-based pricing model are technology, fashion (clothing, shoes, jewelry, makeup, etc.), personal beauty (barbers, hairstylists, and cosmetologists), and professional services (marketing, accounting, fitness, law, landscaping, etc.).
3. Competitive-based pricing.
Many small business owners price their products or services based on those of their competition. This pricing strategy can help you stay aligned with market rates and ensure your offerings remain competitively priced. Competitive-based pricing can make your business more attractive to price-conscious customers and allow you to stay profitable. However, remember that this approach can also lead to "price wars," resulting in lower profits.
Competitive pricing is used across a number of industries, most notably retail, hospitality (hotels, resorts, food and beverage, travel), and manufacturing. Many businesses opt for competitive pricing during the winter holidays to attract more customers and finish the year strong.
4. Price skimming.
Have you ever purchased something only to see its original price gradually drop over time? This is known as price skimming, and it helps businesses maximize profits on new, innovative, or in-demand products. The premise is simple – charging a premium price when introducing a product to the market. Then, as competition increases and the product matures, the price is gradually lowered to attract more price-sensitive buyers.
Price skimming is used by businesses in the technology, fashion, automotive, software, gaming, and manufacturing industries, among others.
5. Premium pricing.
Charging a premium for specific products and services is typically associated with high-end luxury brands. However, small businesses like yours can justify a price increase by improving an existing product or service or introducing a product or service with more quality and exclusivity.
The key to successful premium pricing is effectively communicating the value you provide. Educate your customers on the expertise, quality, and attention to detail that goes into your products or services. Highlight the benefits and experiences that set you apart from your competitors. By focusing on the value you deliver rather than the price tag, you can justify your premium positioning and attract the right customers willing to pay for quality.
Disclaimer.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind.
