Pricing Strategies for Small Business
The pricing strategy of your small business can ultimately determine your fate. Small business owners can ensure profitability and longevity by paying close attention to their pricing strategy.
Commonly, in business plans, the pricing strategy has been to be the lowest price provider in the market. This approach comes from taking a quick view of competitors and assuming you can win business by having the lowest price.
Lowest Pricing Does Not Win
Having the lowest price is not a strong position for small business. It invites customers to see your product or service as a commodity and obscures any value-add you offer. Plus, larger competitors with deep pockets and the ability to have lower operating costs will destroy any small business trying to compete on price alone. Avoiding the low price strategy starts by looking at the demand in the market by examining three factors:
1. Competitive Analysis: Don't just look at your competitor's pricing. Look at the whole package they offer. Are they serving price-conscious consumers or the affluent group? What are the value-added services if any? How do you compare?
2. Ceiling Price: The ceiling price is the highest price the market will bear. Survey experts and customers to determine pricing limits. The highest price in the market may not be the ceiling price.
3. Price Elasticity: According to the Harvard Business Review:
Most customers in most markets are sensitive to the price of a product or service, and the assumption is that more people will buy the product or service if it’s cheaper and less will buy it if it’s more expensive. But ... price elasticity shows exactly how responsive customer demand is for a product based on its price. Marketers need to understand how elastic, sensitive to fluctuations in price, or inelastic, largely ambivalent about price changes, their products are when contemplating how to set or change a price.
Some products have a much more immediate and dramatic response to price changes, usually because they’re considered nice-to-have or non-essential, or because there are many substitutes available,” explains Avery. Take for example, beef. When the price dramatically increases, demand may go way down because people can easily substitute chicken or pork.
Once you understand the demand structure in your industry, review your costs and profit goals as set in your business plan or financials.
Avoiding a Price War
Do not get into a price war - odds are you will lose and be left out of business. Take these 4 tips to avoid a deadly price war:
- Enhance Exclusivity: Products or services that are exclusive to your business provide protection from falling prices.
- Drop High Maintenance Goods: There may be products or services in your business that have high customer service and maintenance costs. Drop the unprofitable lines and find out what customers don't want.
- Value-added: Find value your business can add to stand out in the marketplace. Be a unique business in the category.
- Branding: Develop your brand name in the market. Brand name businesses can always stand strong in a price war.
Small businesses with solid pricing strategies can escape a price war and low price position. Carefully, consider your price decisions. Your business depends on it. Also, consider price skimming.