Getting your small business pricing strategies right is critical to the success of your business venture. The factors that will influence the prices you set for your products or services include:
- Your product costs,
- Your position in the market,
- The value your customers place on your product, and
- The response of your competitors.
Your Product Costs
In most situations, the cost of your products will determine the lower limit of your prices. To accept a price that is lower than the cost of producing or sourcing the product will mean that you are operating at a loss.
To define the lower limit of your prices, the first step is to calculate your product costs. I recommend that you look into using a cost accounting method to cost your products.
Your Market Position and Competitive Strategy
In some cases, companies choose to position themselves in certain markets and this may influence their small business pricing strategies. For example, if you have decided to operate in the fast food industry, you are probably going to have to set your prices lower than an upmarket restaurant would, to make your products affordable for families and teenagers.
On the other hand, if you are trying to develop a business identity as a provider of high-quality or specialized products, setting your prices too low might damage your reputation in the long run.
If you are unsure of your market position or you did not undertake any market research I strongly suggest that you go back and do so before you attempt to set your prices.
Value to the Customer
A critical factor in setting your prices is understanding customer value. Most people use more than one criterion when deciding which product to buy. Price is usually important but it may not be the deciding factor for your customers!
You should not just guess what your customer’s preferences are. To do so may result in offering a product or service that does not provide sufficient value to your customers. If you haven’t already, it would be a good idea to do a bit of research on why your customers are likely to buy from you rather than from one of your competitors.
Competitor Responses
Once you have set your prices, how are your competitors likely to respond? Getting yourself immersed in a price war as a new business is probably not an especially good idea. You simply don’t have the resources of an established business (like your competitors) to slug it out and win!
If your competitors are likely to price match, you are better off redefining your product offering to highlight the differences between your product and those of your competitors rather than trying to compete head-on. Find something in your product that customers value more than price and promote your offering on that basis.
