WHY YOUR BUSINESS NEEDS A PRICING STRATEGY
“What should I charge?” is an infamous question often answered with an educated guess. Most small businesses have no pricing strategy whatsoever, or the strategy they do have is completely haphazard. So much opportunity is left on the table.
Having a pricing strategy is important because it gives you a roadmap for determining the best price for your product or service so you can maximize profits, revenue, and shareholder value.
It’s called a pricing strategy because not every price you set will necessarily maximize your margins. You might decide to use a product’s price to compete for business, increase market share, unload excess inventory, or create different revenue scenarios.
Factors to Consider
Be thoughtful about what you want when deciding your pricing strategy. Maybe you are pricing consistent with your geographical area or are wanting to promote a particular product or service. Or maybe you are pricing your product as a premium or as a loss leader. Determining factors start with what you want your position to be.
You will also need to consider the costs of production, labor and market conditions, your business costs, and what you need to stay afloat.
Pricing Affects Sales
Getting the right pricing is a collective balancing act. Price it too high, and your customers may find what you offer elsewhere for less money. Price it too low and you’ll lose money.
Ideally, pricing affects sales in a good way because when your prices go up, your sales and revenue go up, too.
Pricing Sends a Message
There’s truth to the saying, “You get what you pay for.” The key is knowing your target audience, and your product or service’s place in the market. What do you offer that is different from everyone else? The right target audience will pay a premium if they consider it unique and valuable.
Buy a fake Gucci watch, and you won’t be surprised if it falls apart in a week. Spring for the designer bag instead of a knock-off, and it will likely be in excellent condition for as long as you live.
Pricing also sends a message about clout and affluence. There’s an impression associated with premier products, and a strategy around matching the price of a product or service with consumer impression. Savvy brands know where their product is positioned in the marketplace, and have adjusted their pricing strategy according to perceived value.
Take Advantage of Price Inelasticity
Price elasticity measures the responsiveness of demand after a change in pricing. If you like math, the equation is the % change in quantity divided by the % change in price.
If you raise your prices and demand falls because consumers can find a lower-price substitution, that’s price elasticity.
Price inelasticity is when you raise your prices, and the demand doesn’t change or barely changes at all. OSU charges more per ticket for certain football games because fans will pay it. Fans will also pay inflated drink prices once they get there because that’s what’s available.
If you are in a business that can take advantage of a situation like that, you absolutely should.
Don’t Price According to Your Competition
This is so important to remember. Your pricing only matters to your buyer. Not to your competition.
You should price your product or service solely based on its value proposition, and how it fits in the marketplace. Don’t price it according to what your competition is doing. While it’s important to know and understand your competition’s pricing, it should not be the driving force behind your pricing strategy.
If you have a superior product, price it that way. Focus on selling it to the right buyer instead of undercutting your competition to reach price-conscious people.
Who Should Be Involved
A business really needs a CFO or a financial advisor who understands financial modeling and can match the financial needs of the business with its financial strategy. This is challenging for the small business owner because they often don’t have an internal strategic financial leader on staff.
If that’s the case, you could outsource this function. There are companies out there that specialize in pricing strategies for small businesses.
Have questions about your business’s pricing strategy? Just reach out, and we’d be glad to help.