Of the many topics we at SCORE work with entrepreneurs and small businesses on, pricing is usually far down the list of hot topics. Assets, products and services, marketing, business strategy and business plans all are frequent areas of conversation but pricing of products and services is many times not mentioned. In reality, analyzing pricing/pricing for profit is an opportunity that many small business owners do not capitalize on. More often than not we find businesses are underpricing their offerings in the market and importantly do not have an understanding on the different pricing approaches to consider.
On the surface there are two basic theories of pricing — best price and best value. Undifferentiated products (identical products offered by different suppliers) are segmented on price, with customers purchasing on the basis of best price to them. Differentiated products (products with distinct attributes) are segmented on value. Distinguishing your product or service allows customers to choose on the basis of which supplier provides the best value to them. This may or may not be predicated on cost. An observation we have in meeting with many small business owners is that more often than not they are underpricing their products and services in the market.
There are several tips you can use to help you in establishing a pricing strategy.
Avoid the cost-plus mistake: While it is imperative to understand your costs of production, using a “cost plus” pricing scheme ignores the value of what you are providing to your customers. In many instances it results in underpricing your products or services. The value of a product or service is dynamic. Umbrellas are worth more when there are rain clouds on the horizon rather than blue skies, and astute marketers take advantage of this. Another illustration would be the price of hotel rooms around the location of a major sporting event, they always cost more because the timing and availability provides a higher value to the customer.
Consider having an array of product offerings. This will allow the customer to select the specifics of products or services they are interested in: Some customers will always want the best or newest product or service and in turn are willing to pay for it. Others will shop for more price-conscious offerings. If you have both, your chances of making a sale goes up.
Define your value proposition: If you help your customers understand the value of what you are providing you provide a point of differentiation that can go beyond price. These process helps customers understand why they should do business with you instead of someone else. It requires more than just understanding your costs and marking up your products accordingly.
Focus on profit, not margin: High margins are great but combined with low volume they many times are not the most profitable for a business. Consider high margins an avenue to generate more sales and market growth opportunities. A profit — not just a high margin — is what you are after.
Know the competition: A critical component of small business success is a thoughtful analysis of competitive offerings in the market. Knowing how your products or services compare is critical to making pricing decisions and defining your value proposition. If what you are doing is no different than others, price will segment the market.
Thoughtful pricing requires more than just a markup to cover cost. Time spend in understanding the components of pricing will enhance revenue. This will lead to satisfied and profitable customers and in turn a successful business.
Rex Winter is a retired business executive from the agriculture industry, and a volunteer mentor with SCORE's Tip of the MItt chapter. To request an appointment for the free, confidential mentoring services which SCORE offers for small businesses, call (231) 347-4150 in the Petoskey area or (989)731-0287 in the Gaylord area.
This article originally appeared on The Petoskey News-Review: Pricing strategy for small businesses