One of the best ways for small businesses to stay competitive is through pricing strategies. As part of your overall marketing and business plan, your pricing strategy is quite important. But, it can also be one of the most difficult parts of your plan to put together.
Here are six tips that will help you take advantage of your pricing strategy to stay competitive in an increasingly competitive marketplace:
1. Figure out what you can actually afford to charge
First, you need to understand what you can actually afford to charge. If you’re making absolutely no money keeping your business afloat, you’re not going to be selling products for long.
Understanding what you can afford to charge means carefully looking at the costs of your products or services, including the overhead costs that are often more difficult to spot. Then, you figure out how much money you need to keep your business afloat (preferably while keeping your personal budget going, as well).
A good rule of thumb for managing overhead costs is plan on spending 80 cents of every forecasted dollar. This gives you a 20% buffer and if you hit your forecast, you have a nice profit margin.
2. Focus on introducing new and better products
According to an interesting Entrepreneur article on this topic, the best businesses don’t simply focus on competitive pricing. Eventually, the free market will find the price that consumers will pay for a particular product or service, and you’ll just have to stick close to that to remain in business.
But if you don’t want to be completely controlled by these market forces, innovate. Focus on introducing new and better products. Yes, you’ll need to have a pricing strategy for all these new things, too. But if you can get a leg up on the competition with better or more innovative products, you won’t have to be constrained as much by the going price.
3. Keep careful track of costs
Obviously, as you’re creating your pricing strategy, you need to keep track of your costs. Putting your business expenses on a business credit card (compare here) instead of a personal credit card can help you keep track of your spending. All business owners prefer to have a larger profit margin, but getting your profit margin to grow is all about understanding your costs. Cutting costs while keeping your products and services similarly priced will raise your business’s profits.
If you’re not already familiar with basic bookkeeping for your business, it’s time to get there now. And if you need to run more complicated cost and profit margin calculations, it may be best to hire an accountant.
4. Consider lower introductory prices
When you’re just starting out, you can often break into the market by setting your prices lower than those of your competitors. This works if you just want to get your products into the hands of many people, or if you’re breaking into a new local market.
While your prices are set lower, though, you may not bring home much profit. In this situation, it may be wise to look into credit cards or a business line of credit that can help keep your business afloat until you have the customer loyalty you need to raise your prices. Once your prices are higher and your profit margin is better, you can use some of your extra revenue to pay down those credit card balances.
5. Understand how price affects image
Psychology is probably the most difficult piece of setting a pricing strategy, since the way consumers think has much to do with what they’ll pay for a product. Most of the time, consumers will shop for the best value – the lowest price among very similar products.
However, be careful to not set your prices too low if you want to position yourself as a luxury brand. Too low a price for certain products or services could lead customers to believe that your brand’s offerings are shabby, sub-par, or simply not as luxurious as you’d like them to be.
6. Talk to distributors, if necessary
You can’t actually tell your distributors what they have to price your items at, but you definitely can have conversations with them. Explain to distributors why your pricing strategy is important, and how it will benefit both you and them to follow this strategy. Selling to distributors means lower revenue per unit for you, but it usually means higher volume and greater access into the market, and faster.
If you’re having trouble coming up with your business’s pricing strategy, you may want to call in a professional. Those who are more familiar with marketing could help you find the best prices for your products and services. Otherwise, you may just need to do some market research into your competitors, and try out different prices with consumers to see what sells best.