The price is right. How much should you charge for your product or service?
Pricing can make or break a small business. Focus on the value you are delivering and don’t offer regular discounts.
An effective pricing strategy can help your business to grow. Photograph: Alamy Choosing the right pricing strategy can make or break your business. Pitch your price right and you’ve got a decent profit margin, but get it wrong and your brand could suffer irreparable damage. So what pitfalls should you avoid when building a pricing strategy?
The most important aspect of working out your price is deciding whether you’re a cheap commodity business or a premium enterprise, says Carl Reader, author of The Startup Coach.
Without clarity on your market your pricing will be wrong from the start.
“Avoid getting caught in the middle at all costs – no one wants to be too cheap to be considered a prestige product but too expensive to appeal to those saving every penny,” he says. Next, look at the market rate for your offering and make sure you can make a profit.
Pricing low is a temptation for many small businesses but it’s rarely a good move according to Stephen Nightingale, founder of online jewellery firm nightingaleonline.com. “Don’t try to ‘buy’ sales by pricing too low at the expense of your profit margin,” he says. “Breaking even won’t make a contribution to business growth and if you price too low, your profit’s gone.”
Pricing low is a temptation for many small businesses but it’s rarely a good move Slashing prices is a tactic often employed by small businesses trying to get pricing right and though it can increase sales and help cashflow in the short-term, marketing consultant Claire Boyles cautions against falling into the pattern of offering discounts. “Your customers will soon work out that to get a bargain all they have to do is wait for you to reduce the price, and then you’ll have much lower sales in terms of cash actually going into your business.”
But there are exceptions to that rule, and introductory pricing can open doors for small businesses trying to get established. Lindsey Bauer launched Otti Prams with her husband Angus in October 2015. They design limited-edition travel system pushchairs stocked by House of Fraser and independents.
Bauer says the firm’s original price of £375 (including VAT) per pram proved cost prohibitive for a new business entering such a strong, competitive market so they set a special introductory price of £225 (including VAT) per pram. They have been running the introductory offer since last Christmas.
“Our sales and profile have since surged, creating the sustainability to allow future price increases such as when we extend the range this summer,” says Bauer. The couple will increase their prices for their new models in the next couple of months.
Understanding the pricing strategy of your competitors is also vital. “Customers will compare your prices with the competition – if your price is lower, they’ll ask what they’re missing out on and if it’s higher, they’ll ask whether you are taking advantage or genuinely providing a better product,” says Tom Meehan, founder of hotel management software firm Minibarra. “For your customers to chose you over the competition, you have to answer those questions better than they do.”
Competing on price isn’t always the right approach for a small business, however. “Bigger companies have got price nailed – they can deliver quality products quicker and cheaper because they benefit from economies of scale so the greater the volume they process, the lower the cost per unit is,” says Boyles.
As a small business you’re more likely to be successful if you differentiate based on unique features and benefits or scarcity rather than competing on price, Boyles says. “Think of the value of diamonds, attributed to their rarity (or the control of the number of diamonds on the market). The higher the demand, the higher the price people are willing to pay – if what you’re selling is rare, special or unique.”That strategy works for textile artist Cath Janes, founder of online accessories boutique Kraken Kreations. She advises against comparing your price with competitors, especially those who “charge knock-down prices and are ready to undercut for a tiny profit margin” because it can undermine your own sense of worth.
“Instead, I show my customers the various stages of my products from scribbles on paper through to fabric choices, pattern cutting, stitching and packing,” she says. “It helps them understand why I charge the way I do, and appreciate that I’ll never be cheaper than Amazon but will always produce products that are worth the money.”
Undercutting your competition is also inadvisable, according to Dawn Baird of communication consultancy Sensei. Instead of attracting customers, it can put them off. “Charging less than the going rate can create a perception that you’re less experienced or don’t believe in the quality of your own work, so why should the client?”
In a competitive market where consumers have everything they need, an effective pricing strategy needs to be based on the value your product brings to the customer rather than market trends or what the competition charges, says brand specialist Kubi Springer of She Builds Brands.
“A value-based pricing strategy entails communicating how your product will improve your customer’s life so, for example, a technology brand might explain how the product will save the customer time or make their lives easier rather than focusing on how it works,” she says.
This is also true for businesses that sell services to other businesses. Mukarram Bhaiji, a pricing strategy specialist at KPMG, advises firms to consider the benefits they are providing for clients, for example, helping them to sell more or reduce their costs. Once you are clear where you are bringing value, how much value you are delivering, and how that compares with your competitors, it is easier to price your services appropriately.
“As a small business owner you need to understand the sources of value your service brings to your customers,” says Bhaiji. “Unless you understand that you will mis-price your service.”
What about when the price is wrong? Meehan says it’s always easier to reduce your price but it is sometimes possible to increase it. He recommends three steps: “Ensure sure your customers are satisfied with your current product before you increase the price; add extras and improvements to justify it; and prepare for a backlash.”
Dropping or increasing your price isn’t the only route to recovery when you get it wrong. “Consider cross-sales (think the grocer who sells cream when strawberry sales are poor), down-sales (selling a cheaper product now on the basis that your customer might return for a more expensive one later) and up-sales (adding a more expensive element to a baseline package),” advises Springer. “Creating a strategic partnership with another brand that enables you to cross-sell products can also be a wise move.”
The right pricing strategy takes into account the actual costs of running your business and prioritises profit margin, but it also safeguards the future, says Richard Taylor, founder of software development firm ISArc. “Your profit margin is what keeps you afloat and pricing well allows you to forward plan, whether that’s replacing expensive equipment three years from now or helping you prepare for the unforeseen events that can otherwise set a small business back.”