What should I charge? A common question for many small business owners. Charge too little and profit suffers, charge too much and sales decline. When it comes to pricing your products or services, there is no right or wrong answer. But, your long-term growth and profit will ultimately reflect the decisions you make. So here are common pricing mistakes to avoid AND some things you should consider to maximize your bottom line.
Common Pricing Mistakes
Lack of controls on discounting. Discounts and special offers may have their place, but if used as a standard closing tool, it costs you a lot of profit. Have a strategy and purpose when it comes to offering discounts.
Cost-plus pricing. Setting your prices based on a standard markup and cost ignores value and competition. Some products or services end up over-priced; but more often in small businesses, many are under-priced – leaving profit on the table. Know your costs and have a profit margin goal – but raise or lower your selling price based on competition and value.
Inadequate systems for tracking competition. You need a method to periodically check what competitors are doing in terms of price, value, and products or services. Google alerts and other on-line services can make this easier to monitor.
Poor execution on price changes or increases. Changing prices is part of doing business. But how you communicate and implement the changes can make a big difference in retention and new business.
Price inconsistencies. While you may operate locally or regionally, your customers have access to information nationally and globally. If the trade-off between price and value is not strong for your products or services, your price may appear unfair or too high. Be aware of all their options and consider this in pricing decisions.
Incentives based on revenue not profit measures. Sales incentives or commissions based on sales versus profit can have a big impact on margins. It tends to encourage discounting and easy sales (lower margin products) – instead of high-margin premium products.
What Should I Charge?
There are a lot of factors that go into your pricing decisions, such as cost, competition, market conditions, quality and other intangibles like service and convenience. So instead of asking what should I charge, start with a much more relevant question: How much do customers value the products, services or other intangibles I offer?
Here are some additional questions you might want to consider as you develop your pricing:
- Do I want to maximize sales or maximize profit – overall and at the product or service level?
- Do I want to use cost-plus pricing or value-based pricing?
- Should I have a single price or multiple pricing based on targets or other factors?
- Should prices vary in different geographic areas based on costs, competition, and/or market conditions?
- Do I plan to use a variety of distribution channels? If so, how will the pricing vary?
- Should I use quantity discounts? If so, how will they be used.
- What image do I want my price to convey? Quality, convenience or low cost?
- How flexible can we be in pricing? Can we customize or semi-customize? Can we adjust pricing quickly based on market conditions?
- Do price points already exist for the products or services? If so, what are they (range) and how do they differ from high price to low price?
- How visible should my prices be? From highly visible, to help promote a low price or reinforce the quality image, to hidden, to generate interest unhindered by price considerations.
- Are there bundling, packaging or joint product considerations? Bundles typically provide more value or savings than buying the items individually.
Pricing and Marketing
Pricing is one of the elements of marketing and is related to your products positioning, such as quality, convenience or low cost. But it also affects the other elements such as product features, channel or distribution decisions, and promotion. You can’t fund these things if your pricing strategies produce little or no gross profit margins. You can, however,
Limit the low margin products you sell – and promote the heck out of premium or higher margin products or services
Look for ways to reduce ‘product or delivery’ costs so more profit falls to the bottom line
Find alternate, cost-effective ways to get your products or services to customers – joint ventures or the web are just a few.
Identify cost-effective ways to add value that customers will pay for – so you can raise prices more than the cost of the value added.
Differentiate yourself so you stop competing on price
Pricing is one of the key profit levers in your business. Don’t just throw a price out there and hope for the best. Give it a little thought, do a little research. When done properly, here’s three things YOUR pricing should do:
- Achieve your financial goals and profit objectives. The key here is to have objectives and know your true costs.
- Fit the realities of the market place. Will customers buy at that price based on value and competition?
- Support your positioning and other elements of your marketing, such as distribution channels, promotions, and product uniqueness.
Consider all three when you establish your prices and you’ll stay on the path to sustained profit and long-term growth.
Ready to Put Your Business on the Path to Success?
Would working with a business coach help you take your business to a whole new level? Then let’s explore the possibilities with a complimentary consultation. It’s a chance to get to know each other, discuss your goals and the obstacles that hold you back. Together we can determine if there is a good fit between your needs and my services.
To learn more or schedule an appointment, call me at (856) 533-2344 or drop me an email Joan@HybridBizAdvisors.com