One of the main goals of any small business is to make a profit, this can be achieved by efficient management of the resources and by offering a correct price for the product/services.
In this competitive marketplace, it is very important for businesses to set up a pricing strategy, meaning a standard price must be set for the product/services. There are many factors that affect the profit of a small business and one such factor is pricing. Appropriate pricing of the products and services helps businesses to maximize profit on sales and helps in maintaining a good relationship with its customers.
If the prices are too high or too low compared to the market price, it will lead the business in to serious financial problem. If you charge a high price, you may be out of the market and if you charge too little you may not be able to cover the cost, so to avoid this risk, effective pricing is very important.
A successful pricing strategy
An efficient pricing strategy needs to facilitate achievement of business objectives by ensuring the value of a product/service compared to prices offered by the competitors. There are different types of pricing strategies in the business, however, there is no surest formula that will be suitable for all types of products/services, business, and market.
It does not have to be a stressful process, only a few important factors need to be considered while setting up the price
- The business objective is to make a profit
- It is much easier to lower your prices than to raise them.
- Detail research of the market will help the business to establish the right price.
- The right price is fair to the customers (i.e., they are willing to pay it) and the business (i.e. cover costs and make a profit).
How to do the pricing for your business?
For setting up the pricing strategy, small business owners need to understand customer demand within the market, must review the cost involved, supply chain and profit goals, different pricing models can be applied while setting up the price.
1. Cost-Plus Pricing:
This is a straightforward and easy to implement pricing strategy, it is the foundation for any smart pricing and is both easy to calculate and apply to the products/services.
The selling price is determined by adding a markup to the unit cost, there are three steps involved in cost-plus pricing
- Fix how much cost is involved to produce a product.
- Fix on how much margin the business wants to make- It is also called the “markup”.
- Calculate the final price by combining these two figures.
Thorough research needs to be done on the cost, they are classified into two types Fixed and Variable, further, do not forget to include the hidden or infrequent costs.
2. Competitive Pricing:
Setting the price of product/services based on competition. Researching on competitors is simple – by going through their websites, marketing flyers, phoning or asking them for a quote. Based on the research, a comparison chart of the major competitors needs to be prepared, and with the help of the chart, the pricing can be strategized.
3. Value-based pricing:
In this strategy, the price is based on the perceived or estimated value of the product/services. This is done when purchasing decision is emotionally- driven or when scarcity is involved.
4. Charges per Hour:
For services the prices should be based on-
- Commonly used service-based businesses and contractors
- The per-hour cost factors in all business costs including wages and overheads.
5. Price skimming:
It is also called skim pricing, in this pricing strategy prices are set up high initially and then gradually it is lowered to enter the market and attract more price-sensitive customers. This is done where there is very little competition, price skimming is not a viable long-term pricing strategy.
6. Penetration pricing:
It is a strategy where it prioritizes market share over profits for a given period. In this, the goal is to create a high demand, generate a customer base rapidly and maximize the brand in a short span. The price is set as low as possible to rapidly enter a competitive market and then provoke word to mouth recommendations. After a period of growth, the business typically raises prices to increase profit.
Small businesses do the mistake of underpricing the products/services to convince the customer that their products/services are the least expensive. However, pricing them too low will have a disastrous impact on the business. Reducing prices to the point where the business is giving away the product will not be in the best interest for the long term.
On the flip side, overpricing a product/service can be challenging as the customer is always looking at the competitors pricing, Moreover, if the prices are beyond customer’s capacity to pay, it will also decrease the sales or one might end up losing customers.
Business owners should always have a hang of what customers think. Short surveys asking them whether the pricing was fair always comes in handy.
One needs to gauge business priorities too, while pricing the product/services. It is important for the small business to know what is to be achieved from the business, aside from maximizing profits- for instance, it is important for the business to maximize market share with the products/services. This will decrease the cost or it will result in a “network effect” which means the value of the products/services will increase as more people use them.
Another important factor to be considered is quality, the business should be known for its quality rather than just being the cheapest on the market. In this case, businesses may need to price higher for the product/services to reflect the quality.
*NETCorp is not an accounting firm, HR specialist, or financial advisors and therefore we encourage you to do your on fact finding research
