In the hundreds of business plans I have reviewed, the most common pricing strategy I've seen declared has been "to be the lowest price provider", and to accomplish this by "being the lowest-cost producer"; not only is this much easier said than done for a small business, it is undesirable!
This approach comes from assuming you can win more business by having the lowest price.
For most small business owners, this approach to pricing threatens your business' financial viability and longevity.
1. Lowest Price Rarely Wins
Having the lowest price is not a strong pricing position for small business--it is a form of "business suicide". Larger competitors who have deeper pockets, and lower operating costs, will destroy any small business trying to compete on price alone.
There is a way to get out of the trap of thinking you have to have a "low price strategy" to compete. Think about this...if you raised your current prices by 10%, how many customers would you lose? My guess is you would lose very few, or maybe even none of them. Don't leave money on the table! If you are providing value to your customers, and are helping them to solve their problems, they will pay you what you're worth.
2. Conduct a Competitive Analysis
Looking only at your competitors' prices is a common mistake in setting prices. You must also look at the entire value packages they offer, and then compare it to your own value offerings.
As you set your prices, consider what attributes of your product or services are important to your customers. Below are some examples of value factors that go into determining a product or a service's price:
For a product:
- Quality of raw materials
- Finished product performance
- Packaging appeal
- On-time delivery
- After-sale service and warranties
For a service:
- Experience level and knowledge of service provider
- Bottom-line impact of the final deliverable
- Appearance and professionalism of the service provider
- Response time on phone calls/emails
- Ability to meet deadlines
- Ability to stay within budget
More value provided translates in the potential to charge a higher price!
Click here to download a free guide,
How to Do a Competitor Analysis.
3. Determine your Market's Ceiling Price
The ceiling price is the highest price the market will bear. The best way to determine this number is to read industry news, experts' opinions, and trade publications that publish this type of data. You can also survey customers (current or potential) to determine their pricing limits. Be aware that the highest price currently in the market may not be the ceiling price.
Critical Note: Remember, there are different value networks out there! Each different market segment may be willing to pay a different price for your product and service offerings. For example, a large corporation can pay more for marketing consulting services than a small one-person start-up. Perhaps it is time to increase the value of the network you are working!
Conclusion
Consider these three factors in developing your pricing strategy.
Leave the low prices and price wars to big business. Small businesses with solid pricing strategies can reap the rewards of higher profit margins, and increase chances of business success. Make being in business financially worth it for you.
© Copyright 2008, Bonita L. Richter.
