Pricing is often difficult when you operate a small business, but you must get it right. In this article, I’ll cover this complex topic with some general advice on how to choose a pricing strategy for your small business. Pricing strategy is part art and part science, and there is much to consider. Let’s dive in.
Two Ends of the Pricing Strategy Spectrum
In coaching small business owners for over two decades, I’ve noticed that business owners often end up on two ends of a spectrum.
On one end are small business owners whose prices are too low. They want to crush the competition and fuel fast growth, so they slash prices to bring people into their shop. The problem is that these prices result in a low-profit margin, which can stifle the growth of your small business.
On the other end are small business owners whose prices are too high. They believe in the quality and value of their product or service and think people should pay for it! While believing in your products and services is good, this pricing strategy may scare customers away and prevent your business from getting off the ground.
Today I’m encouraging you to move away from these ends of the spectrum. Good pricing that is reasonable for both you as the business owner and your customers is the best way to create stable profitability and grow your small business.
5 Factors that Influence Pricing Strategy
Pricing strategy is not simple—many factors will influence the price you set for your goods and services. Here are some things to consider:
- Cost of Goods: How much you pay for the goods you sell (or the various costs that go into the services you offer) will impact your pricing strategy because it sets the base for how low your prices can go.
- Competition: How much your competition charges for their related products and services also gives you a comparison point for your pricing strategy.
- Market Demand: The basic laws of supply and demand will also impact your pricing strategy. In general, low supply and high demand are associated with higher prices, and high supply and low demand are associated with lower prices.
- Niche: As I have mentioned time and time again, finding and owning your niche is the optimal way to grow your small business. Not only can it help your marketing strategy, but having a unique or specialty business can allow you to charge more.
- Brand Strategy: You should also be aware that pricing is an important component of your overall brand strategy. Is your brand strategy built around low pricing (like Walmart) or high-end pricing (like Tiffany & Co.)?
These are some main factors influencing a small business pricing strategy. Of course, you should be on the lookout for other factors that may impact pricing too. For example, convenience stores can get away with a 15-20 percent premium (or more!) on just about anything they sell. Customers are okay with that because they know they are paying for convenience.
9 Pricing Strategy Options
Now that you’ve narrowed down some factors that could influence your small business pricing strategy, it’s time to look at some of the major types of pricing strategies used today. I’ll list them alphabetically, as they are not in any order of importance.
- Competitive Pricing: Setting your prices based on what the competition is charging.
- Cost-Plus Pricing: Considering the cost of the item and then adding a certain percentage to it.
- Dynamic Pricing: Constantly changing pricing to match current demand.
- Economy Pricing: Pricing some goods cheaper than the competition to get people in the door.
- Geographical Pricing: Setting the price point based on local factors, including taxes, tariffs, shipping costs, rent, and supply and demand in the local area.
- Penetration Pricing: Attempting to penetrate a new market by offering considerably lower pricing and making up for the low-profit margin through sales volume.
- Price Skimming: Setting prices as high as the market will allow, then lowering them over time.
- Promotional Pricing: Offering discounts and deals on particular items for a limited time to generate buzz and excitement.
- Value-Based (or Premium) Pricing: Setting prices according to what customers think the product is worth.
It’s important to note that a small business owner may choose more than one pricing strategy at any given time for their various goods and services or change the strategy throughout the year.
3 Bonus Tips on How to Choose a Pricing Strategy for Your Small Business
I want to leave you with a few additional tips based on my career helping small business owners build and grow their businesses.
- Cover Costs: This is the number one rule—you must price in a way that allows your business to survive, so always make sure you charge more than what you pay!
- Maximize Profit: You’ll also want to look for ways to maximize your profit wherever you can. For example, if you have few competitors and solid demand, don’t be afraid to add a few extra profit dollars into your pricing.
- Control Costs: When you want to increase profit, controlling your costs is just as effective as raising your prices. You can make more money in your small business by working diligently to keep costs down.
Your Small Business Pricing Strategy
When it comes to how to choose a pricing strategy for your small business, you can see that there is no ‘one size fits all’ solution. Your small business pricing strategy will depend on your products and services, brand, competition, and more. So go into it thoughtfully, weighing these factors and considering your options. And remember that pricing strategy can change as your business grows and even fluctuate during the year.
If you have any extra tips on small business pricing strategy, I’d love to hear them! What has worked for you? What challenges have you faced? Share your thoughts in the comments below.