Small Business Pricing Strategy: Best Practices + Pitfalls to Avoid

Small Business Pricing Strategy: Best Practices + Pitfalls to Avoid

Of all the difficulties small business owners face, one of the most pressing and difficult to overcome is setting a pricing strategy. What do you charge for your products or services? This is not an easy question to answer.

No matter what you're selling price is vitally important. Small changes in pricing can produce dramatic results. You may be losing revenue you could be earning by under-charging for your products or services. Alternatively, you could be losing customers and sales by charging too much. Pricing is the factor that has the largest impact on sales and profits.

An effective price strategy will not only help you sell your products or services in the short-term but will also increase your profitability over the long-term. The key is to understand the fundamentals of pricing and what value you offer to your target market.

An effective small business pricing strategy helps you:

  • Meet or exceed your revenue targets
  • Remain competitive in your market by pricing your products in relation to those of competitors
  • Retain or increase your market share
  • Retain customer loyalty and keep your customers buying from you no matter what changes in the market
  • Retain your image and reputation as a company that offers quality products at an appropriate price.

Here are 10 best practices when developing your pricing strategy:

  1. Be Objective – Create a detailed profile of your target customer with as much objective data as possible.
  2. Be Understanding – Start pricing your products by understanding what your customers are willing to pay.
  3. Focus – Decide in the beginning whether you prefer high sales volume at low prices, or a higher profit margin per sale but higher prices.
  4. Position Correctly – Use product positioning to explain to your customers the unique value your products and services offer.
  5. Keep an Eye on the Competition – Watch your competitors and use their pricing to help you set your own.
  6. Test – Test different prices and pricing strategies to see what’s most effective for your customers.
  7. Don’t Forget Costs – When setting prices, figure in your costs and make sure that you're making enough profit per sale.
  8. Add Value – If customers feel your prices are too high, it's much better to add value and keep prices high than to decrease prices.
  9. Avoid Dropping Prices – Only reduce prices permanently when you really need to and always explain to customers why you're doing it.
  10. Stay Flexible – Keep listening to your market and stay flexible because pricing is an ongoing concern.

And, here are 10 pitfalls to avoid:

  1. Not Being Realistic – Pricing your products based on what you think they're worth, rather than what your target market thinks they're worth.
  2. No Due Diligence – Failure to research your target market well.
  3. No Explanation – Raising or lowering your prices without giving any reason to your customers.
  4. Not Keeping an Eye on the Competition – Ignoring competitors and failing to understand the competitive landscape.
  5. Under Valuing – Setting prices too low, thereby giving your customers the feeling that your product is low quality.
  6. Lack of Growth Anticipation – Basing prices completely on cost, which depends on sales volume and will scale as your business grows.
  7. No Diversity – Thinking that all customers and markets are the same when it comes to prices.
  8. Too Much Automation – Setting it and forgetting it, rather than staying in tune with market changes and changes among your customers.
  9. Picking the Wrong Battles – Trying to compete with major retailers who buy in bulk and therefore can afford to offer lower prices.
  10. Not Putting Your Best Foot Forward – Failing to convey your product's unique value to your customers.

Monitoring Your Pricing Strategy

It's difficult for any business to get their prices right the first time, no matter how well they know their customers, understand market conditions and calculate their own costs. As you roll out your pricing strategy, you will need to monitor your profits regularly and evaluate whether the prices you chose are appropriate or not.

Key indicators to do this include:

Financial Statements – Keep a keen eye on sales and examine your financial statements carefully. Make sure that you're reaching the sales target you expected when you set your prices. In addition to looking at your overall sales results, you should also consider each product individually so that you can see whether one product's sales are flagging, possibly due to being priced inappropriately.

Costs and Your Bottom Line – Consider each fixed and variable cost to determine how it affects your bottom line. See if there are ways to manage costs so that you can offer the right price that will earn you enough profit. One of the largest costs to consider is labor. Watch your labor costs to see if they're increasing or decreasing. Ideally, they should remain stable over time.

Customer Feedback – Get regular feedback from your customers about pricing. Take every opportunity you have to interact with your customers and get their feedback on every aspect of your business, especially pricing. Make it an ongoing part of your business operations.

Watch Competitors – Even after you've set your pricing, keep an eye on the competition and look for changes in their pricing and marketing. Monitor what your competition is selling and at what price. Try to glean what kind of sales your competitors are having. Try to gain feedback from your competitors' customers. One way to do this indirectly is to read online reviews and comments written by customers about your competitors' service.

Continued Testing – Whenever you have an idea for a new price, offer or tactic, test it. You can test new offers and prices on new customers, as well as using A/B split testing. This is where you offer the same product at two price points to two different markets to see which outperforms the other.

Remember that pricing your products is one of the biggest decisions you’ll make – with a great deal of impact on your business. It's also something that's ongoing. Once you set prices, continue monitoring and experimenting with adjustments.

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About the Author

Andrea Hubbert, principal at Hub+company, is a versatile integrated marketing communications professional with one primary passion: to empower creative individuals and their companies to design and market the business lives of their dreams.

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2 Comments

  1. April on at

    Your tip about diversity is spot on. I have some clients who don’t blink at prices, and others who I don’t mind crafting special pricing packages for because I get so excited about what they’re doing and understand where they are.

    I love that you balanced the post out with things do do and also things to avoid doing.

    • Thanks so much for your great feedback. I’m glad the post resonated with you, and I agree that sometimes the opportunity to work on something cool may impact the price… not too often though!

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